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The contribution of on-site examination ratings to an emprircal model of bank failures

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  • David C. Wheelock
  • Paul W. Wilson

Abstract

This paper investigates how well regulator examinations predict bank failures, and how best to incorporate examination information into an econometric model of time-to-failure. We estimate proportional hazard models with time-varying covariates and find that examiner ratings help explain the failure hazard. Both the overall rating of a bank's condition and management, i.e., the composite CAMELS rating, and ratings of specific components contain information. In addition, we find that the marginal "effect" of ratings is non-linear, in that the impact of a rating downgrade on the probability of failure is larger, the weaker a bank's initial rating.

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File URL: http://research.stlouisfed.org/wp/more/1999-023
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Bibliographic Info

Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 1999-023.

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Date of creation: 1999
Date of revision:
Publication status: Published in Review of Accounting and Finance, November 2005, 4(4), pp. 110-34
Handle: RePEc:fip:fedlwp:1999-023

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Related research

Keywords: Bank failures ; Bank examination;

References

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  1. David C. Wheelock & Paul W. Wilson, 1995. "Why do banks disappear? The determinants of U.S. bank failures and acquisitions," Working Papers 1995-013, Federal Reserve Bank of St. Louis.
  2. Jones, David S. & King, Kathleen Kuester, 1995. "The implementation of prompt corrective action: An assessment," Journal of Banking & Finance, Elsevier, vol. 19(3-4), pages 491-510, June.
  3. Gary Whalen & James B. Thomson, 1988. "Using financial data to identify changes in bank condition," Economic Review, Federal Reserve Bank of Cleveland, issue Q II, pages 17-26.
  4. Allen Berger & Sally Davies, 1994. "The Information Content of Bank Examinations," Center for Financial Institutions Working Papers 94-24, Wharton School Center for Financial Institutions, University of Pennsylvania.
  5. 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.
  6. R. Alton Gilbert, 1993. "Implications of annual examinations for the Bank Insurance Fund," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 35-52.
  7. Rebel A. Cole & Jeffery W. Gunther, 1995. "FIMS: a new monitoring system for banking institutions," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Jan, pages 1-15.
  8. Allen N. Berger & Sally M. Davies, 1994. "The information content of bank examinations," Proceedings 55, Federal Reserve Bank of Chicago.
  9. Flannery, Mark J & Houston, Joel F, 1999. "The Value of a Government Monitor for U.S. Banking Firms," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(1), pages 14-34, February.
  10. Robert DeYoung, 1998. "Management Quality and X-Inefficiency in National Banks," Journal of Financial Services Research, Springer, vol. 13(1), pages 5-22, February.
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Cited by:
  1. Thomas B. King & Daniel A. Nuxoll & Timothy J. Yeager, 2006. "Are the causes of bank distress changing? can researchers keep up?," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 57-80.
  2. David C. Wheelock & Paul Wilson, 2002. "Consolidation in US banking: which banks engage in mergers?," Working Papers 2001-003, Federal Reserve Bank of St. Louis.

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