Sub-debt yield spreads as bank risk measures
Several recent studies have recommended greater reliance on subordinated debt as a tool to discipline bank risk taking. Some of these proposals recommend using sub-debt yield spreads as triggers for supervisory discipline under prompt corrective action (PCA). Currently such action is prompted by capital adequacy measures. This paper provides the first empirical analysis of the relative accuracy of various capital ratios and sub-debt spreads in predicting bank condition: measured as subsequent CAMEL or BOPEC ratings. The results suggest that some of the capital ratios, including the summary measure used to trigger PCA, have almost no predictive power. Sub-debt yield spreads performed slightly better than the best capital measure, the Tier-1 leverage ratio, albeit the difference is not significant. The performance of sub-debt yields satisfies an important pre-requisite for using sub-debt as a PCA trigger. However, the prediction errors are relatively high and further work to refine the measures would be desirable.
|Date of creation:||2001|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://www.chicagofed.org/
More information through EDIRC
|Order Information:|| Web: http://www.chicagofed.org/webpages/publications/print_publication_order_form.cfm Email: |
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.:
- Allen N. Berger & Sally M. Davies & Mark J. Flannery, 2000.
"Comparing market and supervisory assessments of bank performance: who knows what when?,"
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.
- 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.).
- Arturo Estrella & Sangkyun Park & Stavros Peristiani, 2000. "Capital ratios as predictors of bank failure," Economic Policy Review, Federal Reserve Bank of New York, issue Jul, pages 33-52.
- Douglas D. Evanoff & Larry D. Wall, 2000. "The role of subordinated debt in bank safety and soundness regulation," Proceedings 673, Federal Reserve Bank of Chicago.
- Diana Hancock & Myron Kwast, 2001. "Using Subordinated Debt to Monitor Bank Holding Companies: Is it Feasible?," Journal of Financial Services Research, Springer, vol. 20(2), pages 147-187, October.
- George J. Benston & George G. Kaufman, 1998. "Deposit insurance reform in the FDIC Improvement Act: the experience to date," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q II, pages 2-20.
- George J. Benston & George G. Kaufman, 1988. "Risk and solvency regulation of depository institutions: past policies and current options," Staff Memoranda 88-1, Federal Reserve Bank of Chicago.
- Robert R. Bliss & Mark J. Flannery, 2000. "Market discipline in the governance of U.S. Bank Holding Companies: monitoring vs. influencing," Working Paper Series WP-00-3, Federal Reserve Bank of Chicago.
- Jeffery W. Gunther & Robert R. Moore, 2000. "Early warning models in real time," Financial Industry Studies Working Paper 00-01, Federal Reserve Bank of Dallas.
- Douglas D. Evanoff & Larry D. Wall, 2000.
"Subordinated debt and bank capital reform,"
2000-24, Federal Reserve Bank of Atlanta.
- Edward J. Kane, 1985. "The Gathering Crisis in Federal Deposit Insurance," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262611856, June.
- R. Alton Gilbert & Andrew P. Meyer & Mark D. Vaughan, 1999. "The role of supervisory screens and econometric models in off-site surveillance," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 31-56.
- Jones, David, 2000. "Emerging problems with the Basel Capital Accord: Regulatory capital arbitrage and related issues," Journal of Banking & Finance, Elsevier, vol. 24(1-2), pages 35-58, January.
- Shumway, Tyler, 2001. "Forecasting Bankruptcy More Accurately: A Simple Hazard Model," The Journal of Business, University of Chicago Press, vol. 74(1), pages 101-24, January.
- Julapa Jagtiani & George Kaufman & Catharine Lemieux, 1999. "Do markets discipline banks and bank holding companies? evidence from debt pricing," Emerging Issues, Federal Reserve Bank of Chicago, issue Jun.
- Smirlock, Michael & Gilligan, Thomas & Marshall, William, 1984. "Tobin's q and the Structure-Performance Relationship," American Economic Review, American Economic Association, vol. 74(5), pages 1051-60, December.
- Gerard Caprio & Patrick Honohan, 2008.
Department of Economics Working Papers
2008-07, Department of Economics, Williams College.
- Gerard Caprio & Patrick Honohan, 2008. "Banking Crises," Center for Development Economics 2008-09, Department of Economics, Williams College.
- Gerard Caprio, Jr. and Patrick Honohan, 2008. "Banking Crises," The Institute for International Integration Studies Discussion Paper Series iiisdp242, IIIS.
- Pettway, Richard H & Sinkey, Joseph F, Jr, 1980. " Establishing On-Site Bank Examination Priorities: An Early-Warning System Using Accounting and Market Information," Journal of Finance, American Finance Association, vol. 35(1), pages 137-50, March.
- D'Souza, Julia & Jacob, John, 2000. "Why firms issue targeted stock," Journal of Financial Economics, Elsevier, vol. 56(3), pages 459-483, June.
- Diana Hancock & Myron L. Kwast, 2001. "Using subordinated debt to monitor bank holding companies: is it feasible?," Finance and Economics Discussion Series 2001-22, Board of Governors of the Federal Reserve System (U.S.).
- Jeffrey W. Allen & John J. McConnell, 1998. "Equity Carve-Outs and Managerial Discretion," Journal of Finance, American Finance Association, vol. 53(1), pages 163-186, 02.
- 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.
- Smirlock, Michael, 1985. "Evidence on the (Non) Relationship between Concentration and Profitability in Banking," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 17(1), pages 69-83, February.
When requesting a correction, please mention this item's handle: RePEc:fip:fedhwp:wp-01-03. 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: (Bernie Flores)
If references are entirely missing, you can add them using this form.