Equity and bond market signals as leading indicators of bank fragility

Arbeitspapier

We analyse the ability of the distance-to-default and bond spreads to signal bank fragility. We show that both indicators are complete and unbiased and that spreads are non-linear in the probability of bank default. We empirically test these properties in a sample of EU banks. We find leading properties for both indicators. The distance-to-default exhibits lead times of 6 to 18 months. Spreads have signal value close to default only, in line with the theory. We also find that implicit safety nets weaken the predictive power of spreads. Further, the results suggest complementarity between both indicators, reducing type I errors. We also examine the interaction of the indicators with other bank information.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: ECB Working Paper ; No. 150

Classification and Topics

• Classification: Wirtschaft ; Banks; Depository Institutions; Micro Finance Institutions; Mortgages ; Asset Pricing; Trading Volume; Bond Interest Rates
• Subject: Bank fragility ; banking ; Market Indicators

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Gropp, Reint E. ; Vesala, Jukka ; Vulpes, Giuseppe
• Event: Veröffentlichung
• (who): European Central Bank (ECB)
• (where): Frankfurt a. M.
• (when): 2002

Further information

• Handle: http://hdl.handle.net/10419/152584
• Last update: 10.03.2025, 11:41 AM CET