Incorporating Equity Market Variables into Supervisory Monitoring Models

FRB of San Francisco Working Paper No. 2001-14

51 Pages Posted: 11 Dec 2001

See all articles by John Krainer

John Krainer

Board of Governors of the Federal Reserve System

Jose A. Lopez

Federal Reserve Bank of San Francisco

Date Written: September 2001

Abstract

We examine whether equity market variables, such as stock returns and equity-based default probabilities, are useful to bank supervisors for assessing the condition of bank holding companies. Using an event study framework, we find that equity market variables anticipate supervisory ratings changes by up to four quarters and that the improvements in forecast accuracy arising from conditioning on equity market information are statistically significant. We develop an off-site monitoring model that easily combines supervisory and equity market information, and we find that the model's forecasts also anticipate supervisory ratings changes by several quarters. While the inclusion of equity market variables in the model does not improve forecast accuracy by much relative to simply using supervisory variables, we conclude that equity market information is useful for forecasting supervisory ratings and should be incorporated into supervisory monitoring models.

Keywords: market information, bank supervision, forecasting

JEL Classification: G0, G2

Suggested Citation

Krainer, John and Lopez, Jose Antonio, Incorporating Equity Market Variables into Supervisory Monitoring Models (September 2001). FRB of San Francisco Working Paper No. 2001-14. Available at SSRN: https://ssrn.com/abstract=293017 or http://dx.doi.org/10.2139/ssrn.293017

John Krainer

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Jose Antonio Lopez (Contact Author)

Federal Reserve Bank of San Francisco ( email )

101 Market Street
San Francisco, CA 94105
United States
415-977-3894 (Phone)
415-974-2168 (Fax)

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