The Information Content of Bank Examinations
The role of information acquisition for bank regulators is important for the recognition and possible control of bank risk. This role is also consistent with the modern theory of banking under which banks hold a substantial amount of private information about their loan customers, and by implication, private information about their own conditions. The authors suggest that the main purpose of bank examinations is information acquisition. In order to maintain the safety and soundness of the banking system, regulators conduct regular on-site reviews of operations and determine a composite rating for the institution, known as its CAMEL rating. The authors test whether bank exams do in fact result in significant information acquisition. Their tests involve observation of how capital markets react around the times of examinations and whether these reactions are related to changes in examination ratings. They use event study methodology and track the cumulative abnormal returns on an institution's stock price before and after the examination relative to the predictions of a two-factor market model. Data are for institutions whose stocks were actively traded on major exchanges from 1985-1989 - a relatively stable regulatory regime. The question of whether bank examinations succeed in discovering substantial private information about loan quality and bank risk is crucial to answering policy questions regarding financial system reform. The modern theory of banking often rests on the assumption that are delegated monitors because of scale economies in information acquisition about borrowers. An extension of this theory might suggest that there are economies of scale in "monitoring the monitors". These economies of scale do not necessarily imply that government agencies should be the monitors. However, under the current federal safety net and deposit insurance regime, the federal government bears greater losses than do their creditors in the event of bank failure.
(This abstract was borrowed from another version of this item.)
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Cole, Rebel A., 1998. "The importance of relationships to the availability of credit," Journal of Banking & Finance, Elsevier, vol. 22(6-8), pages 959-977, August.
- Joe Peek & Eric S. Rosengren & Geoffrey M. B. Tootell, 1999.
"Is Bank Supervision Central To Central Banking?,"
The Quarterly Journal of Economics,
MIT Press, vol. 114(2), pages 629-653, May.
- 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.
- Boyd, John H. & Prescott, Edward C., 1986.
Journal of Economic Theory,
Elsevier, vol. 38(2), pages 211-232, April.
- Berger, Allen N. & King, Kathleen Kuester & O'Brien, James M., 1991. "The limitations of market value accounting and a more realistic alternative," Journal of Banking & Finance, Elsevier, vol. 15(4-5), pages 753-783, September.
- Rebel Cole & Jeffery Gunther, 1998. "Predicting Bank Failures: A Comparison of On- and Off-Site Monitoring Systems," Journal of Financial Services Research, Springer, vol. 13(2), pages 103-117, April.
- James, Christopher, 1987. "Some evidence on the uniqueness of bank loans," Journal of Financial Economics, Elsevier, vol. 19(2), pages 217-235, December.
- Mathias Dewatripont & Jean Tirole, 1994. "The prudential regulation of banks," ULB Institutional Repository 2013/9539, ULB -- Universite Libre de Bruxelles.
- 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.
- Allen N. Berger & Sally M. Davies & Mark J. Flannery, 1998.
"Comparing market and supervisory assessments of bank performance: who knows what when?,"
Finance and Economics Discussion Series
1998-32, Board of Governors of the Federal Reserve System (U.S.).
- 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.
- Berger, Allen N & Davies, Sally M & Flannery, Mark J, 2000. "Comparing Market and Supervisory Assessments of Bank Performance: Who Knows What When?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(3), pages 641-67, August.
- Holthausen, Robert W. & Leftwich, Richard W., 1986. "The effect of bond rating changes on common stock prices," Journal of Financial Economics, Elsevier, vol. 17(1), pages 57-89, September.
- Peek, Joe & Rosengren, Eric, 1995.
"Bank regulation and the credit crunch,"
Journal of Banking & Finance,
Elsevier, vol. 19(3-4), pages 679-692, June.
- Joe Peek & Eric S. Rosengren & Geoffrey M. B. Tootell, 1998. "Does the Federal Reserve have an informational advantage? you can bank on it," Working Papers 98-2, Federal Reserve Bank of Boston.
- Sally M. Davies, 1991. "Accounting for prediction variance in event studies," Finance and Economics Discussion Series 173, Board of Governors of the Federal Reserve System (U.S.).
- Katerina Simons & Stephen Cross, 1991. "Do capital markets predict problems in large commercial banks?," New England Economic Review, Federal Reserve Bank of Boston, issue May, pages 51-56.
- Berger, Allen N & Udell, Gregory F, 1995. "Relationship Lending and Lines of Credit in Small Firm Finance," The Journal of Business, University of Chicago Press, vol. 68(3), pages 351-81, July.
- Lummer, Scott L. & McConnell, John J., 1989. "Further evidence on the bank lending process and the capital-market response to bank loan agreements," Journal of Financial Economics, Elsevier, vol. 25(1), pages 99-122, November.
- repec:cup:cbooks:9780521466387 is not listed on IDEAS
- Brown, Stephen J. & Warner, Jerold B., 1985. "Using daily stock returns : The case of event studies," Journal of Financial Economics, Elsevier, vol. 14(1), pages 3-31, March.
- Hand, John R M & Holthausen, Robert W & Leftwich, Richard W, 1992. " The Effect of Bond Rating Agency Announcements on Bond and Stock Prices," Journal of Finance, American Finance Association, vol. 47(2), pages 733-52, June.
- Robert DeYoung & Mark J. Flannery & William W. Lang & Sorin M. Sorescu, 1998. "Could publication of bank CAMEL ratings improve market discipline?," Proceedings 600, Federal Reserve Bank of Chicago.
- Billett, Matthew T & Flannery, Mark J & Garfinkel, Jon A, 1995. " The Effect of Lender Identity on a Borrowing Firm's Equity Return," Journal of Finance, American Finance Association, vol. 50(2), pages 699-718, June.
- Benston, George J & Marlin, John Tepper, 1974. "Bank Examiners' Evaluation of Credit: An Analysis of the Usefulness of Substandard Loan Data," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 6(1), pages 23-44, February.
- Graham, David R & Humphrey, David Burras, 1978. "Bank Examination Data as Predictors of Bank Net Loan Losses," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 10(4), pages 491-504, November.
When requesting a correction, please mention this item's handle: RePEc:kap:jfsres:v:14:y:1998:i:2:p:117-144. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Guenther Eichhorn)or (Christopher F. Baum)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.