Early warning systems

Banks and banking ; Bank supervision ; Problem banks

Is banking on the brink? another look

Banks and banking ; Risk

A note of caution on early bank closure

Bank failures ; Bank capital ; Problem banks

Have large banks become riskier? recent evidence from option markets

Options (Finance) ; Risk ; Banks and banking

Bank capital standards for foreign exchange and other market risks

The Basle Committee on Banking Supervision has proposed methods for incorporating consideration of market risks--exchange rate, interest rate, and equity price risks--into risk-based capital standards for banks. This paper shows that the separate and seemingly different proposed approaches to the three sources of risk are consistent with one another, reflecting a single unifying theme. That theme is the measurement of risk through a weighting of two different measures of portfolio size, the gross position and the net position. A simple theoretical model demonstrates that such an approach can be viewed as a simple (specifically, an affine) approximation to a portfolio variance calculation based on the full variance-covariance matrix of market returns, and thus provides a reasonable basis for a practical approach to capital standards. An empirical test of one part of the framework, the proposal for exchange rate risk, shows that the approximation may be very accurate: the proposed Basle approach captures over 95 percent of the variation in foreign exchange risk across a sample of banks from the Twelfth Federal Reserve District.Bank capital ; Risk ; Foreign exchange

The persistence of bank profits: what the stock market implies

This paper examines the speed with which abnormal economic profits vanish in the U.S. banking industry. A model is developed to infer expected speeds of profit adjustment from stock market and financial accounting data, deriving the rate of adjustment that is most consistent with observed cross-sectional relationships between bank stock prices and profitability. The model allows for the possibility that reported accounting income may be a biased and noisy signal of economic profit. Estimation is performed using generalized nonlinear least squares on a pooled series of cross sections. The results indicate that the expected rate of adjustment tends to be significantly greater than zero, although smaller than adjustment speeds found in studies of nonbank firms. The estimated speed of adjustment for negative profits is greater than for positive profits; for banks with high profit rates, the adjustment speed is near zero, implying that supernormal profits are very long-lived.Bank profits ; Bank stocks ; Banks and banking - Accounting ; Stock market

Interstate banking and risk

Interstate banking ; Risk ; Banks and banking - West ; Federal Reserve District, 12th

Competitive forces and profit persistence in banking

Bank competition ; Bank stocks ; Bank profits

Risk-adjusted deposit insurance premiums

Deposit insurance ; Risk

A Contingent Claim Analysis of Risk-based Capital Standards for Banks

Many countries are implementing capital adequacy standards developed under the auspices of the Bank for International Settlements (BIS), which explicitly link each bank’s minimum capital-to-asset ratio to the riskiness of its operations. In this paper, we use a contingent claim framework to examine the general questions of what goals a risk-based capital framework might be designed to achieve and how risk-based standards might be expected to influence bank behaviour. We identify two related but distinct regulatory policy goals, and derive a capital adequacy rule to achieve each goal: a liability-value (LV) rule designed to limit the contingent liability borne by the deposit guarantor per dollar of deposits; and a failure-probability (FP) rule designed to limit the probability of bank insolvency. We show that an LV rule is likely to push banks toward low-risk, low-capital combinations, whereas an FP rule is likely to encourage high risk and high capital ratios. The results suggest that restrictions on bank asset holdings and on overall financial leverage may be desirable in conjunction with risk-based capital standards. We then consider the extent to which the BIS standards reflect either an FP or an LV approach to capital regulation. The BIS standards assign risk weights to various types of assets, and establish a minimum ratio of capital to the sum of risk-weighted assets. We find that a BIS-type standard with appropriately chosen weights could be an extremely close approximation to a rule designed to achieve either goal, but that the actual weightings contained in the accord are most consistent with an FP rule. However, we show that the weight assigned to riskless assets should be negative if regulatory goals make an LV rule desirable; we also find that under either LV or FP rules the weight given to risky assets probably should be substantially higher than established in the BIS agreement. The optimal weights also depend on the typical range of risks in bank portfolios. Since this range may vary from one financial system to the next, it may be desirable to retain a degree of national discretion in setting the precise weightings.