Finding the Bad Apples in the Barrel: Using the Market Value of Equity to Signal Banking Sector Vulnerabilities

August 16, 2019

Preview Citation

Format: Chicago

Will Kerry. Finding the Bad Apples in the Barrel: Using the Market Value of Equity to Signal Banking Sector Vulnerabilities, (USA: International Monetary Fund, 2019) accessed September 20, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

This paper measures the performance of different metrics in assessing banking system vulnerabilities. It finds that metrics based on equity market valuations of bank capital are better than regulatory capital ratios, and other metrics, in spotting banks that failed (bad apples). This paper proposes that these market-based ratios could be used as a surveillance tool to assess vulnerabilities in the banking sector. While the measures may provide a somewhat fuzzy signal, it is better to have a strategy for identifying bad apples, even if sometimes the apples turn out to be fine, than not being able to spot any bad apples before the barrel has been spoiled.

Subject: Banking, Capital adequacy requirements, Credit default swap, Distressed institutions, Financial crises, Financial institutions, Financial markets, Financial regulation and supervision, Global financial crisis of 2008-2009, Money, Stock markets

Keywords: Bank, Bank health, Banks, Capital, Capital adequacy requirements, Credit default swap, Distressed institutions, Equity market, Global, Global financial crisis of 2008-2009, Leverage, Market, Market value of capital., Market-adjusted capital ratio, Market-based capital ratios, North America, Problem bank, Signaling bank distress, Stock markets, WP

Publication Details

Pages:

29
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2019/180
Stock No:

WPIEA2019180
ISBN:

9781513511030
ISSN:

1018-5941

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