Equity and Bond Market Signals as Leading Indicators of Bank Fragility

59 Pages Posted: 17 Jan 2003

See all articles by Reint Gropp

Reint Gropp

Halle Institute for Economic Research

Jukka M. Vesala

Bank of Finland - Finnish Financial Supervision Authority (FIN-FSA)

Giuseppe Vulpes

Unicredit Banca d'Impresa - Research Department; UniCredit

Multiple version iconThere are 2 versions of this paper

Date Written: June 2002

Abstract

We analyse the ability to the distance-to-default and bond spreads to signal bank fragility. We show that both indicators are complete and unbiased and that spreads are non-linear in the probability of bank default. We empirically test these properties in a sample of EU banks. We find leading properties for both indicators. The distance-to-default exhibits lead times of 6 to 18 months. Spreads have signal value close to default only, in line with the theory. We also find that implicit safety nets weaken the predictive power of spreads. Further, the results suggest complementarity between both indicators, reducing type I errors. We also examine the interaction of the indicators with other bank information.

Keywords: Banking, Bank fragility, Market Indicators

JEL Classification: G21, G12

Suggested Citation

Gropp, Reint and Vesala, Jukka and Vulpes, Giuseppe and Vulpes, Giuseppe, Equity and Bond Market Signals as Leading Indicators of Bank Fragility (June 2002). Available at SSRN: https://ssrn.com/abstract=357901 or http://dx.doi.org/10.2139/ssrn.357901

Reint Gropp (Contact Author)

Halle Institute for Economic Research ( email )

P.O. Box 11 03 61
Kleine Maerkerstrasse 8
D-06017 Halle, 06108
Germany

Jukka Vesala

Bank of Finland - Finnish Financial Supervision Authority (FIN-FSA) ( email )

P.O. Box 160
FIN-00101 Helsinki
Finland

Giuseppe Vulpes

Unicredit Banca d'Impresa - Research Department ( email )

Via S. Prospero 1
Milan, 20121
Italy
+39-0288622315 (Phone)
+39-028862448 (Fax)

HOME PAGE: www.unicreditimpresa.it

UniCredit ( email )

Via S. Prospero 1
Milan, 20121
Italy
+39-0288622315 (Phone)
+39-028862448 (Fax)

HOME PAGE: www.unicreditimpresa.it

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