Extracting Leading Indicators of Bank Fragility from Market Prices - Estonia Focus

30 Pages Posted: 16 Feb 2006  

Yu-Fu Chen

University of Dundee - Department of Economic Studies

Michael Funke

University of Hamburg - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Kadri Männasoo

Bank of Estonia

Date Written: January 2006

Abstract

Banking reform has proved to be one of the most problematic elements of economic transition in central and Eastern Europe. Therefore the paper considers the development of the Estonian banking sector and derives individual banks' fragility scores during transition. To this end we use option-based tools and equity prices to estimate distance-to-default measures of banks' distress probabilities. Overall, the results suggest that market indicators are moderately useful for anticipating future financial distress and rating changes in transition economies. The implication for an effective supervisory framework is to use a plurality of risk scores when assessing bank vulnerability.

Keywords: banking, financial stability, bank fragility, options, Estonia

JEL Classification: E44, E58, G21

Suggested Citation

Chen, Yu-Fu and Funke, Michael and Männasoo, Kadri, Extracting Leading Indicators of Bank Fragility from Market Prices - Estonia Focus (January 2006). CESifo Working Paper No. 1647. Available at SSRN: https://ssrn.com/abstract=884344

Yu-Fu Chen

University of Dundee - Department of Economic Studies ( email )

Dundee DD1 4HN, Scotland
United Kingdom
+44 1382 344 383 (Phone)
+44 1382 344 691 (Fax)

Michael Funke (Contact Author)

University of Hamburg - Department of Economics ( email )

Von-Melle-Park 5
room 2128 C rise
Hamburg, 20146
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Kadri Männasoo

Bank of Estonia ( email )

Estonia Building 13
15095 Tallinn
Estonia

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