Finding the Bad Apples in the Barrel: Using the Market Value of Equity to Signal Banking Sector Vulnerabilities

Will Kerry

No 2019/180, IMF Working Papers from International Monetary Fund

Abstract: This paper measures the performance of different metrics in assessing banking system vulnerabilities. It finds that metrics based on equity market valuations of bank capital are better than regulatory capital ratios, and other metrics, in spotting banks that failed (bad apples). This paper proposes that these market-based ratios could be used as a surveillance tool to assess vulnerabilities in the banking sector. While the measures may provide a somewhat fuzzy signal, it is better to have a strategy for identifying bad apples, even if sometimes the apples turn out to be fine, than not being able to spot any bad apples before the barrel has been spoiled.

Keywords: WP; bank; market; problem bank; Banks; capital; leverage; market value of capital.; market-adjusted capital ratio; equity market; market-based capital ratios; signaling bank distress; bank health; Capital adequacy requirements; Distressed institutions; Credit default swap; Stock markets; Global financial crisis of 2008-2009; Global; North America (search for similar items in EconPapers)
Pages: 29
Date: 2019-08-16
New Economics Papers: this item is included in nep-ban and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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