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Using securities market information for bank supervisory monitoring

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  • John Krainer
  • Jose A. Lopez

Abstract

Bank supervisors in the United States conduct comprehensive on-site inspections of bank holding companies (BHCs) and assign them a supervisory rating meant to summarize their overall condition. We develop an empirical forecasting model of these ratings that combines supervisory and securities market data. We find that securities market variables, such as BHC stock returns and bond yield spreads, improve the model’s in-sample fit. We also find that debt market variables provide more information on supervisory ratings for BHCs closer to default, while equity market variables provide more information for those further from default. In out-of sample forecasting, we find that the accuracy of the model with both equity and debt variables is little different from the accuracy of a model based on supervisory information alone. However, the model with securities market data identifies additional ratings downgrades, which supervisors would probably value enough to warrant the use of this extended model for off-site monitoring purposes.

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Bibliographic Info

Paper provided by Federal Reserve Bank of San Francisco in its series Working Papers in Applied Economic Theory with number 2004-05.

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Date of creation: 2004
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Handle: RePEc:fip:fedfap:2004-05

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Keywords: Bank supervision ; Stock market ; Bond market ; Securities;

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References

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  1. Allen N. Berger & Sally M. Davies & Mark J. Flannery, 2000. "Comparing market and supervisory assessments of bank performance: who knows what when?," Proceedings, Federal Reserve Bank of Cleveland, pages 641-670.
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  12. Diana Hancock & Myron Kwast, 2001. "Using Subordinated Debt to Monitor Bank Holding Companies: Is it Feasible?," Journal of Financial Services Research, Springer, vol. 20(2), pages 147-187, October.
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  21. Jeffery W. Gunther & Mark E. Levonian & Robert R. Moore, 2001. "Can the stock market tell bank supervisors anything they don't already know?," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, issue Q II, pages 2-9.
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Citations

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Cited by:
  1. Peresetsky, A. A., 2011. "What factors drive the Russian banks license withdrawal," MPRA Paper 41507, University Library of Munich, Germany.
  2. Coffinet, J. & Pop, A. & Tiesset, M., 2010. "Predicting Financial Distress in a High-Stress Financial World: The Role of Option Prices as Bank Risk Metrics," Working papers 311, Banque de France.
  3. Greg Caldwell, 2007. "Best Instruments for Market Discipline in Banking," Working Papers 07-9, Bank of Canada.
  4. Martín Saldías, 2012. "Systemic Risk Analysis using Forward-Looking Distance-to-Default Series," Working Papers w201216, Banco de Portugal, Economics and Research Department.
  5. Olivier BROSSARD (LEREPS-GRES ) & Frédéric DUCROZET (PSE - Crédit Agricole) & Adrian ROCHE (EconomiX - Crédit Agricole), 2007. "An Early Warning Model for EU banks with Detection of the Adverse Selection Effect," Cahiers du GRES 2007-08, Groupement de Recherches Economiques et Sociales.

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