Using Loan Rates to Measure and Regulate Bank Risk: Findings Immodest Proposal

Posted: 17 Feb 2004

See all articles by Donald P. Morgan

Donald P. Morgan

Federal Reserve Bank of New York

Adam B. Ashcraft

Federal Reserve Bank of New York

Abstract

There is strong evidence that the interest rates charged by banks on the flow of newly extended Commercial & Industrial (C&I) loans predict future loan performance and CAMEL rating downgrades by bank supervisors. While internal risk ratings have little explanatory power for future loan performance, they do help predict future CAMEL downgrades. These findings suggest that supervisors might consider using interest rates in the off-site surveillance of banks. At the same time, we propose that reformers consider basing capital requirements and deposit insurance premia on loan interest rates instead of (or in addition to) internal risk ratings and models.

Keywords: Deposit insurance reform, credit risk pricing, risk-based capital regulation

Suggested Citation

Morgan, Donald P. and Ashcraft, Adam B., Using Loan Rates to Measure and Regulate Bank Risk: Findings Immodest Proposal. Journal of Financial Services Research, Vol. 24, No. 2-3, pp. 181-200. Available at SSRN: https://ssrn.com/abstract=502606

Donald P. Morgan

Federal Reserve Bank of New York ( email )

33 Liberty Street
Research Department
New York, NY 10045
United States
212-720-6573 (Phone)

Adam B. Ashcraft (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045-0001
United States
212-720-1617 (Phone)
212-720-8363 (Fax)

Register to save articles to
your library

Register

Paper statistics

Abstract Views
1,068
PlumX Metrics