How good is the market at assessing bank fragility? A horse race between different indicatorsJournal of Banking and Finance (2002)
AbstractFor a sample of individual banks, active in the East Asian countries during the years 1995-1998, we explore the performance of three sets of indicators of bank fragility computed on the basis of publicly available information. We compare the behavior of traditional “early warning” indicators, based on balance sheet information, with that of implicit deposit insurance premia, based on the stock prices dynamics, and with the behavior of credit rating agencies’ assessments. We find significantly different patterns among the three groups of indicators in their ability of forecasting financial distress at both a specific point in time and through time. More specifically in the South East Asia crisis episode the information based on stock prices or on judgmental assessments of credit rating agencies did not outpace backward looking information contained in balance sheet data. Stock market based information, though, has responded more quickly to changing financial conditions than ratings of credit risk agencies. Overall, the evidence supports the policy conclusion that, where the information processing is quite costly, as in most developing countries, it is important to simultaneously use a plurality of indicators of banks’ fragility.
- financial fragility,
- camel ratings,
- deposit insurance,
Citation InformationPaola Bongini, Luc Laeven and Giovanni Majononi. "How good is the market at assessing bank fragility? A horse race between different indicators" Journal of Banking and Finance Vol. 26 Iss. 5 (2002)
Available at: http://works.bepress.com/paola_bongini/17/