Pricing bank stocks: the contribution of bank examinations
In the wake of recent studies concluding that financial markets effectively demand risk premia on noninsured bank securities, the debate has intensified over whether we should place greater reliance on markets and less reliance on direct regulatory oversight. This study contributes to the debate by investigating the interaction between the market's pricing of bank equity securities and the regulatory examination process during the early stages of New England's banking crisis in the late 1980s and early 1990s. It addresses the concern that reducing regulatory oversight may adversely affect ...
Using bank supervisory data to improve macroeconomic forecasts
Locating the function of bank supervision in the central bank has been a contentious issue, both domestically and internationally. Most discussions of the role of bank supervision in central banking have focused on crisis management and the responsibilities of the central bank as a lender of last resort. However, recent research by the authors has shown that confidential supervisory information garnered through bank examinations potentially can improve the forecasts of key macroeconomic variables and thus the conduct of monetary policy. Forecasting macroeconomic variables is essential to the ...
The information value of the stress test and bank opacity
We investigate whether the ?stress test,? the extraordinary examination of the nineteen largest U.S. bank holding companies conducted by federal bank supervisors in 2009, produced the information demanded by the market. Using standard event study techniques, we find that the market had largely deciphered on its own which banks would have capital gaps before the stress test results were revealed, but that the market was informed by the size of the gap; given our proxy for the expected gap, banks with larger capital gaps experienced more negative abnormal returns. Our findings suggest that the ...
A new supervisory system for rating banks
Are banking supervisory data useful for macroeconomic forecasts?
Some argue that central banks can improve monetary policy by including confidential supervisory assessments of banking organizations in their forecasts of inflation and unemployment. In this study we examine the extent to which forecasts of these variables would have been improved with the inclusion of supervisory data. We begin by reproducing the earlier results used to support the claim. We critically examine them and extend the analysis from in-sample to out-of-sample testing. Finally, we check the robustness of our findings by extending the analysis period, using a different methodology ...
The contribution of on-site examination ratings to an emprircal model of bank failures
This paper investigates how well regulator examinations predict bank failures, and how best to incorporate examination information into an econometric model of time-to-failure. We estimate proportional hazard models with time-varying covariates and find that examiner ratings help explain the failure hazard. Both the overall rating of a bank's condition and management, i.e., the composite CAMELS rating, and ratings of specific components contain information. In addition, we find that the marginal "effect" of ratings is non-linear, in that the impact of a rating downgrade on the probability of ...
The information content of bank examinations
Reform of the financial and banking regulatory structures
The informational advantage of specialized monitors: the case of bank examiners
Large commercial banking firms are monitored by specialized private sector monitors and by specialized government examiners. Previous research suggests that bank exams produce little useful information that is not already reflected in market prices. In this article, we apply a new research methodology to a unique data set, and find that government exams of large national banks produce significant new information which financial markets do not fully internalize for several additional months. Our results indicate that specialized government monitors can identify value-relevant information about ...