Distance to Default, Subordinated Debt, and Distress Indicators in the Banking Industry

18 Pages Posted: 8 Nov 2010

See all articles by Paul Kato

Paul Kato

affiliation not provided to SSRN

Jens Hagendorff

University of Edinburgh - Business School

Abstract

The recent financial crisis has highlighted the inadequacy of present supervisory arrangements to identify reliable ex-ante indicators of banking distress. For a sample of US bank holding companies, we analyse the extent to which distance to default based on market data can be explained using accounting-based indicators of risk. We show that a larger number of bank fundamentals help predict default for institutions that issue subordinated debt. For banks that issue sub-debt, we find that higher charter values and low bank capitalizations further increase the power of bank fundamentals to predict default risk.

Suggested Citation

Kato, Paul and Hagendorff, Jens, Distance to Default, Subordinated Debt, and Distress Indicators in the Banking Industry. Accounting & Finance, Vol. 50, No. 4, pp. 853-870, December 2010, Available at SSRN: https://ssrn.com/abstract=1702596 or http://dx.doi.org/10.1111/j.1467-629X.2010.00354.x

Paul Kato (Contact Author)

affiliation not provided to SSRN

No Address Available

Jens Hagendorff

University of Edinburgh - Business School ( email )

University of Edinburgh
29 Buccleuch Place
Edinburgh, Scotland EH8 9JS
UNITED KINGDOM

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