Using Securities Market Information for Bank Supervisory Monitoring

John Krainer and Jose Lopez

International Journal of Central Banking, 2008, vol. 4, issue 1, 125-164

Abstract: U.S. bank supervisors conduct comprehensive inspections of bank holding companies and assign them a supervisory rating, known as a BOPEC rating prior to 2005, meant to summarize their overall condition. We develop an empirical model of these BOPEC ratings that combines supervisory and securities market information. Securities market variables, such as stock returns and bond yield spreads, improve the model's in-sample fit. Debt market variables provide more information on supervisory ratings for banks closer to default, while equity market variables provide useful information on ratings for banks further from default. The out-of-sample accuracy of the model with securities market variables is little different from that of a model based on supervisory variables alone. However, the model with securities market information identifies additional ratings downgrades, which are of particular importance to bank supervisors who are concerned with systemic risk and contagion.

JEL-codes: G14 G21 (search for similar items in EconPapers)
Date: 2008
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Citations: View citations in EconPapers (14)

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Related works:
Working Paper: Using securities market information for bank supervisory monitoring (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:ijc:ijcjou:y:2008:q:1:a:4

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