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Conference Paper
Equity and bond market signals as leading indicators of bank fragility
We analyse the ability of equity market-based distances-to-default and subordinated bond spreads to signal a material weakening in banks' financial condition. Using option pricing, we show that both indicators are complete and unbiased indicators of bank fragility. We empirically test these properties using a sample of EU banks. Two different econometric models are estimated: a series of logit-models, which were estimated for different time-leads, and a proportional hazard model. We find support in favour of using both the distance-to-default and spread as leading indicators of bank ...
Journal Article
Market indicators, bank fragility, and indirect market discipline
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.
Working Paper
Did Consumers Want Less Debt? Consumer Credit Demand Versus Supply in the Wake of the 2008-2009 Financial Crisis
We explore the sources of household balance sheet adjustment following the collapse of the housing market in 2006. First, we use microdata from the Federal Reserve Board?s Senior Loan Officer Opinion Survey to document that banks cumulatively tightened consumer lending standards more in counties that experienced a house price boom in the mid-2000s than in nonboom counties. We then use the idea that renters, unlike homeowners, did not experience an adverse wealth shock when the housing market collapsed to examine the relative importance of two explanations for the observed deleveraging and the ...
Conference Paper
Deposit insurance, moral hazard, and market monitoring
Journal Article
How important are hedge funds in a crisis?
Before the 2007?09 crisis, standard risk measurement methods substantially underestimated the threat to the financial system. One reason was that these methods didn?t account for how closely commercial banks, investment banks, hedge funds, and insurance companies were linked. As financial conditions worsened in one type of institution, the effects spread to others. A new method that more accurately accounts for these spillover effects suggests that hedge funds may have been central in generating systemic risk during the crisis.