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Incorporating equity market information into supervisory monitoring models

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  • John Krainer
  • Jose A. Lopez

Abstract

We examine whether equity market variables, such as stock returns and equity-based default probabilities, are useful to bank supervisors for assessing the condition of bank holding companies. Using an event study framework, we find that equity market variables anticipate supervisory ratings changes by up to four quarters and that the improvements in forecast accuracy arising from conditioning on equity market information are statistically significant. We develop an off-site monitoring model that easily combines supervisory and equity market information, and we find that the model's forecasts also anticipate supervisory ratings changes by several quarters. While the inclusion of equity market variables in the model does not improve forecast accuracy by much relative to simply using supervisory variables, we conclude that equity market information is useful for forecasting supervisory ratings and should be incorporated into supervisory monitoring models.

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Bibliographic Info

Paper provided by Federal Reserve Bank of San Francisco in its series Working Paper Series with number 2001-14.

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Date of creation: 2001
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Handle: RePEc:fip:fedfwp:2001-14

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Keywords: Stocks ; Bank supervision;

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