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Financial market signals and banking supervision: are current practices consistent with research findings?

Author

Listed:
  • Frederick T. Furlong
  • Robard Williams

Abstract

The trend toward incorporating information derived from financial markets into the bank supervision process has gained momentum over the past several years. This in part reflects an evolution in the thinking about how private market information can contribute to the process. In light of the evolving view of the potential contributions of market information, this paper reviews the empirical evidence relevant to the usefulness of financial market information in the bank supervision process. This paper reviews the research on what information can be gleaned from the pricing of equity and debt securities issued by banking organizations. The weight of the research leaves little room for doubt that financial market signals reflect underlying bank risk and that market evaluations of the risk of individual banking organizations are strongly correlated with supervisory findings. The evidence on the extent to which market signals can augment the information set of bank supervisors is more subtle, but overall it demonstrates that financial market signals should play a role in the bank supervision process.

Suggested Citation

  • Frederick T. Furlong & Robard Williams, 2006. "Financial market signals and banking supervision: are current practices consistent with research findings?," Economic Review, Federal Reserve Bank of San Francisco, pages 17-29.
  • Handle: RePEc:fip:fedfer:y:2006:p:17-29
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Frederick T. Furlong & Simon H. Kwan, 2006. "Safe & sound banking, 20 years later: what was proposed and what has been adopted," Proceedings, Federal Reserve Bank of San Francisco.
    2. Calluzzo, Paul & Dong, Gang Nathan, 2015. "Has the financial system become safer after the crisis? The changing nature of financial institution risk," Journal of Banking & Finance, Elsevier, vol. 53(C), pages 233-248.
    3. Frederick T. Furlong & Simon H. Kwan, 2006. "Safe and sound banking, 20 years later: what was proposed and what has been adopted," Working Paper Series 2006-27, Federal Reserve Bank of San Francisco.
    4. Kessler, Denis, 2008. "Insurance market mechanisms and government interventions," Journal of Banking & Finance, Elsevier, vol. 32(1), pages 4-14, January.
    5. Bushman, Robert M., 2014. "Thoughts on financial accounting and the banking industry," Journal of Accounting and Economics, Elsevier, vol. 58(2), pages 384-395.
    6. Elizabeth K. Kiser & Robin A. Prager & Jason R. Scott, 2016. "Supervisory Ratings and Bank Lending to Small Businesses During the Financial Crisis and Great Recession," Journal of Financial Services Research, Springer;Western Finance Association, vol. 50(2), pages 163-186, October.
    7. Akhigbe, Aigbe & Madura, Jeff & Marciniak, Marek, 2012. "Bank capital and exposure to the financial crisis," Journal of Economics and Business, Elsevier, vol. 64(5), pages 377-392.
    8. Selçuk Caner & Süheyla Özyıldırım & A. Ungan, 2012. "How Sensitive Are Bank Managers to Shareholder Value?," Journal of Financial Services Research, Springer;Western Finance Association, vol. 42(3), pages 187-205, December.

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