Journal Article

Can the stock market tell bank supervisors anything they don't already know?

Abstract: This article provides evidence consistent with recent policy proposals calling for a greater role for market forces in promoting a safe and sound financial system. The authors' empirical results indicate a measure of expected default probability distilled from equity prices helps predict the financial condition of individual banking organizations, as reflected in their supervisory ratings. Moreover, the stock market data have predictive power over and above the information in the quarterly financial statements available to supervisors between inspections. These findings suggest financial markets can provide useful information to supplement supervisory assessments, particularly between inspections, and point to the value of additional research to further clarify the information content of market prices and quantities.

Keywords: Banks and banking; bank examinations; Bank supervision;

Bibliographic Information

Provider: Federal Reserve Bank of Dallas

Part of Series: Economic and Financial Policy Review

Publication Date: 2001

Issue: Q II

Pages: 2-9