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Using Securities Market Information for Bank Supervisory Monitoring

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  • John Krainer

    (Economic Research Department, Federal Reserve Bank of San Francisco)

  • Jose A. Lopez

    (Economic Research Department, Federal Reserve Bank of San Francisco)

Abstract

U.S. bank supervisors conduct comprehensive inspections of bank holding companies and assign them a supervisory rating, known as a BOPEC rating prior to 2005, meant to summarize their overall condition. We develop an empirical model of these BOPEC ratings that combines supervisory and securities market information. Securities market variables, such as stock returns and bond yield spreads, improve the model's in-sample fit. Debt market variables provide more information on supervisory ratings for banks closer to default, while equity market variables provide useful information on ratings for banks further from default. The out-of-sample accuracy of the model with securities market variables is little different from that of a model based on supervisory variables alone. However, the model with securities market information identifies additional ratings downgrades, which are of particular importance to bank supervisors who are concerned with systemic risk and contagion.

Suggested Citation

  • John Krainer & Jose A. Lopez, 2008. "Using Securities Market Information for Bank Supervisory Monitoring," International Journal of Central Banking, International Journal of Central Banking, vol. 4(1), pages 125-164, March.
  • Handle: RePEc:ijc:ijcjou:y:2008:q:1:a:4
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    References listed on IDEAS

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    Cited by:

    1. Hale, Galina & Lopez, Jose A., 2019. "Monitoring banking system connectedness with big data," Journal of Econometrics, Elsevier, vol. 212(1), pages 203-220.
    2. Eduardo Levy-Yeyati & Marõa Soledad Martõnez Perõa & Sergio L. Schmukler, 2010. "Depositor Behavior under Macroeconomic Risk: Evidence from Bank Runs in Emerging Economies," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(4), pages 585-614, June.
    3. Jérôme Coffinet & Adrian Pop & Muriel Tiesset, 2013. "Monitoring Financial Distress in a High-Stress Financial World: The Role of Option Prices as Bank Risk Metrics," Journal of Financial Services Research, Springer;Western Finance Association, vol. 44(3), pages 229-257, December.
    4. Miller, Scott & Olson, Eric & Yeager, Timothy J., 2015. "The relative contributions of equity and subordinated debt signals as predictors of bank distress during the financial crisis," Journal of Financial Stability, Elsevier, vol. 16(C), pages 118-137.
    5. Jérôme Coffinet & Adrian Pop & Muriel Tiesset, 2010. "Predicting Financial Distress in a High-Stress Financial World: The Role of Option Prices as Bank Risk Metrics," Working Papers hal-00547744, HAL.
    6. Saldías, Martín, 2013. "Systemic risk analysis using forward-looking Distance-to-Default series," Journal of Financial Stability, Elsevier, vol. 9(4), pages 498-517.
    7. Flannery, Mark J. & Giacomini, Emanuela, 2015. "Maintaining adequate bank capital: An empirical analysis of the supervision of European banks," Journal of Banking & Finance, Elsevier, vol. 59(C), pages 236-249.
    8. Saldías, Martín, 2013. "Systemic risk analysis using forward-looking Distance-to-Default series," Journal of Financial Stability, Elsevier, vol. 9(4), pages 498-517.
    9. Peresetsky, A. A., 2011. "What factors drive the Russian banks license withdrawal," MPRA Paper 41507, University Library of Munich, Germany.
    10. Khoa TA Hoang & Robert Faff & Mamiza Haq, 2014. "Market discipline and bank risk taking," Australian Journal of Management, Australian School of Business, vol. 39(3), pages 327-350, August.
    11. Gong, Xiao-Li & Liu, Xi-Hua & Xiong, Xiong & Zhang, Wei, 2020. "Research on China's financial systemic risk contagion under jump and heavy-tailed risk," International Review of Financial Analysis, Elsevier, vol. 72(C).
    12. Greg Caldwell, 2007. "Best Instruments for Market Discipline in Banking," Staff Working Papers 07-9, Bank of Canada.
    13. Peresetsky, Anatoly, 2013. "Modeling reasons for Russian bank license withdrawal: Unaccounted factors," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 30(2), pages 49-64.
    14. Hwa, Vivian & Kapinos, Pavel & Ramirez, Carlos D., 2018. "Does regulatory bank oversight impact economic activity? A local projections approach," Journal of Financial Stability, Elsevier, vol. 39(C), pages 167-174.

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    More about this item

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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