Finding the Bad Apples in the Barrel: Using the Market Value of Equity to Signal Banking Sector Vulnerabilities
30 Pages Posted: 28 Aug 2019
Date Written: August 2019
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: Suggested Citation