Using Securities Market Information for Bank Supervisory Monitoring

Federal Reserve Bank of San Francisco Working Papers No. 2004-05

48 Pages Posted: 13 May 2004

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: May 5, 2004

Abstract

Bank supervisors in the United States conduct comprehensive on-site inspections of bank holding companies (BHCs) and assign them a supervisory rating meant to summarize their overall condition. We develop an empirical forecasting model of these ratings that combines supervisory and securities market data. We find that securities market variables, such as BHC stock returns and bond yield spreads, improve the model's in-sample fit. We also find that debt market variables provide more information on supervisory ratings for BHCs closer to default, while equity market variables provide more information for those further from default. In out-of sample forecasting, we find that the accuracy of the model with both equity and debt variables is little different from the accuracy of a model based on supervisory information alone. However, the model with securities market data identifies additional ratings downgrades, which supervisors would probably value enough to warrant the use of this extended model for off-site monitoring purposes.

Keywords: Bank supervision

JEL Classification: G14, G21, G28

Suggested Citation

Krainer, John and Lopez, Jose Antonio, Using Securities Market Information for Bank Supervisory Monitoring (May 5, 2004). Federal Reserve Bank of San Francisco Working Papers No. 2004-05. Available at SSRN: https://ssrn.com/abstract=545762 or http://dx.doi.org/10.2139/ssrn.545762

John Krainer (Contact Author)

Board of Governors of the Federal Reserve System ( email )

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

Jose Antonio Lopez

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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