Market indicators, bank fragility, and indirect market discipline

Gropp, Reint; Vesala, Jukka M.; Vulpes, Giuseppe

Journal Article

Market indicators, bank fragility, and indirect market discipline

Abstract: As a theoretical matter, signals from the bond and equity markets satisfy minimal requirements for a useful indicator. Using option pricing formulas, it is shown that a distance to default measure, based on equity market value and equity volatility, increases with the market value of bank assets and decreases with bank leverage and equity volatility.

Keywords: Bank profits; Bank stocks; Banks and banking - Accounting; Bank supervision;