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On credit spread slopes and predicting bank risk

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  • C. N. V. Krishnan
  • Peter H. Ritchken
  • James B. Thomson

Abstract

The authors examine whether credit-spread curves, engendered by a mandatory subordinated-debt requirement for banks, would help predict bank risk. They extract the credit-spread curves each quarter for each bank in our sample, and analyze the information content of credit-spread slopes. They find that credit-spread slopes are significant predictors of future credit spreads. However, credit-spread slopes do not provide significant additional information on future bank-risk variables, over and above other bank-specific and market-wide information.

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  • C. N. V. Krishnan & Peter H. Ritchken & James B. Thomson, 2003. "On credit spread slopes and predicting bank risk," Working Papers (Old Series) 0314, Federal Reserve Bank of Cleveland.
    • Handle: RePEc:fip:fedcwp:0314
    DOI: 10.26509/frbc-wp-200314
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    Cited by:

    1. Krishnan, C.N.V. & Ritchken, Peter H. & Thomson, James B., 2010. "Predicting credit spreads," Journal of Financial Intermediation, Elsevier, vol. 19(4), pages 529-563, October.
    2. Nguyen, Tu, 2013. "The disciplinary effect of subordinated debt on bank risk taking," Journal of Empirical Finance, Elsevier, vol. 23(C), pages 117-141.
    3. Evanoff, Douglas D. & Jagtiani, Julapa A. & Nakata, Taisuke, 2011. "Enhancing market discipline in banking: The role of subordinated debt in financial regulatory reform," Journal of Economics and Business, Elsevier, vol. 63(1), pages 1-22.
    4. Adrian Pop, 2009. "Beyond the Third Pillar of Basel Two: Taking Bond Market Signals Seriously," Working Papers hal-00419241, HAL.
    5. Almer, Thomas & Heidorn, Thomas & Schmaltz, Christian, 2008. "The dynamics of short- and long-term CDS-spreads of banks," Frankfurt School - Working Paper Series 95, Frankfurt School of Finance and Management.
    6. C. N. V. Krishnan & Peter H. Ritchken & James B. Thomson, 2007. "On forecasting the term structure of credit spreads," Working Papers (Old Series) 0705, Federal Reserve Bank of Cleveland.
    7. Krishnan, C.N.V. & Ergungor, O. Emre & Laux, Paul A. & Singh, Ajai K. & Zebedee, Allan A., 2010. "Examining bank SEOs: Are offers made by undercapitalized banks different?," Journal of Financial Intermediation, Elsevier, vol. 19(2), pages 207-234, April.
    8. Kedia, Simi & Zhou, Xing, 2014. "Informed trading around acquisitions: Evidence from corporate bonds," Journal of Financial Markets, Elsevier, vol. 18(C), pages 182-205.
    9. Audzeyeva, Alena & Fuertes, Ana-Maria, 2018. "On the predictability of emerging market sovereign credit spreads," Journal of International Money and Finance, Elsevier, vol. 88(C), pages 140-157.

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