Finding the Bad Apples in the Barrel: Using the Market Value of Equity to Signal Banking Sector Vulnerabilities

30 Pages Posted: 28 Aug 2019

See all articles by Will Kerry

Will Kerry

International Monetary Fund (IMF)

Date Written: August 2019

Abstract

This paper measures the performance of different metrics in assessing banking system vulnerabilities. It finds that metrics based on equity market valuations of bank capital are better than regulatory capital ratios, and other metrics, in spotting banks that failed (bad apples). This paper proposes that these market-based ratios could be used as a surveillance tool to assess vulnerabilities in the banking sector. While the measures may provide a somewhat fuzzy signal, it is better to have a strategy for identifying bad apples, even if sometimes the apples turn out to be fine, than not being able to spot any bad apples before the barrel has been spoiled.

Keywords: Bank credit, Financial crises, Credit default swap contract, Central banks, Interest rates on loans, Banks, capital, leverage, market value of capital., capital ratio, fail bank, leverage ratio, metrics, market-based

JEL Classification: G01, G21, G32, G33, E01, F16, E52, M41

Suggested Citation

Kerry, Will, Finding the Bad Apples in the Barrel: Using the Market Value of Equity to Signal Banking Sector Vulnerabilities (August 2019). IMF Working Paper No. 19/180, Available at SSRN: https://ssrn.com/abstract=3444155

Will Kerry (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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