A Market-Based Measure of Credit Portfolio Quality and Banks' Performance During the Subprime Crisis

European Banking Center Discussion Paper No. 2009-06S

CentER Discussion Paper No. 2009–35S

32 Pages Posted: 30 Sep 2008 Last revised: 21 Nov 2011

See all articles by Martin Knaup

Martin Knaup

CentER, Tilburg University

Wolf Wagner

Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM); Centre for Economic Policy Research (CEPR)

Date Written: November 19, 2009

Abstract

We propose a new method for measuring the quality of banks' credit portfolios. This method makes use of information embedded in bank share prices by exploiting differences in their sensitivity to credit default swap spreads of borrowers of varying quality. The method allows us to derive a credit risk indicator (CRI). This indicator represents the perceived share of high risk exposures in a bank's portfolio and can be used as a risk-weight for computing regulatory capital requirements. We estimate CRIs for the 150 largest U.S. bank holding companies (BHCs). We find that their CRIs are able to forecast bank failures and share price performances during the crisis of 2007-2009, even after controlling for a variety of traditional asset quality and general risk proxies.

Keywords: credit risk, asset quality, banks, subprime crisis

JEL Classification: G21, G28

Suggested Citation

Knaup, Martin and Wagner, Wolf, A Market-Based Measure of Credit Portfolio Quality and Banks' Performance During the Subprime Crisis (November 19, 2009). European Banking Center Discussion Paper No. 2009-06S; CentER Discussion Paper No. 2009–35S. Available at SSRN: https://ssrn.com/abstract=1274815 or http://dx.doi.org/10.2139/ssrn.1274815

Martin Knaup

CentER, Tilburg University ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

HOME PAGE: http://center.uvt.nl/phd_stud/knaup/

Wolf Wagner (Contact Author)

Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM) ( email )

P.O. Box 1738
Room T08-21
3000 DR Rotterdam, 3000 DR
Netherlands

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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