 Sub-debt yield spreads as bank risk measuresDouglas Evanoff and Larry Wall No 2001-11, FRB Atlanta Working Paper from Federal Reserve Bank of Atlanta Abstract: 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 prerequisite 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. Keywords: Risk; Debt; Bank supervision; Bank capital (search for similar items in EconPapers) Published in Journal of Financial Services Research, Oct–Dec 2001and Journal of Banking and Finance, May 2002 Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:fip:fedawp:2001-11 Ordering information: This working paper can be ordered from Access Statistics for this paper More papers in FRB Atlanta Working Paper from Federal Reserve Bank of Atlanta Contact information at EDIRC. |
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