IDEAS home Printed from https://ideas.repec.org/p/fip/fednrp/9805.html
   My bibliography  Save this paper

Judging the risk of banks: what makes banks opaque?

Author

Listed:
  • Donald P. Morgan

Abstract

We argue that the risk of banks is hard for outsiders to judge because the risk of their mostly financial assets is either hard to measure (opaque) or easy to change. We report evidence that bond rating agencies seem to disagree more over banks than over other types of firms. Among banks, bond raters disagree more over opaque assets, like loans, and easily substitutable assets, like cash and trading assets. Fixed assets, like premises, reduce disagreement. Capital also reduces disagreement, but only at trading banks, where the risk of asset shifting may be most severe.

Suggested Citation

  • Donald P. Morgan, 1998. "Judging the risk of banks: what makes banks opaque?," Research Paper 9805, Federal Reserve Bank of New York.
  • Handle: RePEc:fip:fednrp:9805
    as

    Download full text from publisher

    File URL: https://www.newyorkfed.org/medialibrary/media/research/staff_reports/research_papers/9805.html
    Download Restriction: no

    File URL: https://www.newyorkfed.org/medialibrary/media/research/staff_reports/research_papers/9805.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. James, Christopher, 1987. "Some evidence on the uniqueness of bank loans," Journal of Financial Economics, Elsevier, vol. 19(2), pages 217-235, December.
    2. Kashyap, Anil K. & Stein, Jeremy C., 1995. "The impact of monetary policy on bank balance sheets," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 42(1), pages 151-195, June.
    3. Stewart C. Myers & Raghuram G. Rajan, 1998. "The Paradox of Liquidity," The Quarterly Journal of Economics, Oxford University Press, vol. 113(3), pages 733-771.
    4. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    5. Anil K. Kashyap & Jeremy C. Stein, 1997. "What Do a Million Banks Have to Say About the Transmission of Monetary Policy?," NBER Working Papers 6056, National Bureau of Economic Research, Inc.
    6. Edward Kane, 1997. "Ethical Foundations of Financial Regulation," Journal of Financial Services Research, Springer;Western Finance Association, vol. 12(1), pages 51-74, August.
    7. Krasa, Stefan & Villamil, Anne P, 1992. "A Theory of Optimal Bank Size," Oxford Economic Papers, Oxford University Press, vol. 44(4), pages 725-749, October.
    8. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
    9. Jeremy C. Stein, 1998. "An Adverse-Selection Model of Bank Asset and Liability Management with Implications for the Transmission of Monetary Policy," RAND Journal of Economics, The RAND Corporation, vol. 29(3), pages 466-486, Autumn.
    10. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-329, May.
    11. Christina D. Romer & David H. Romer, 1990. "New Evidence on the Monetary Transmission Mechanism," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 21(1), pages 149-214.
    12. Richard Cantor & Frank Packer, 1994. "The credit rating industry," Quarterly Review, Federal Reserve Bank of New York, issue Sum, pages 1-26.
    13. Douglas W. Diamond, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Oxford University Press, vol. 51(3), pages 393-414.
    14. Flannery, Mark J, 1994. "Debt Maturity and the Deadweight Cost of Leverage: Optimally Financing Banking Firms," American Economic Review, American Economic Association, vol. 84(1), pages 320-331, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Rebecca Demsetz & Marc R. Saidenberg, 1999. "Looking beyond the CEO: executive compensation at banks," Staff Reports 68, Federal Reserve Bank of New York.
    2. John S. Jordan, 1999. "Pricing bank stocks: the contribution of bank examinations," New England Economic Review, Federal Reserve Bank of Boston, issue May, pages 39-53.
    3. John Ammer & Frank Packer, 2000. "How consistent are credit ratings? a geographic and sectoral analysis of default risk," International Finance Discussion Papers 668, Board of Governors of the Federal Reserve System (U.S.).
    4. anonymous, 2000. "Improving public disclosure in banking," Staff Studies 173, Board of Governors of the Federal Reserve System (U.S.).

    More about this item

    Keywords

    Bank assets ; Bank capital ; Bank investments ; Risk;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:fednrp:9805. 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: (Amy Farber). General contact details of provider: http://edirc.repec.org/data/frbnyus.html .

    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 CitEc recognized a reference but did not link an item in RePEc 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 RePEc Author Service 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.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.