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Pricing bank stocks: the contribution of bank examinations

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  • John S. Jordan

Abstract

In the wake of recent studies concluding that financial markets effectively demand risk premia on noninsured bank securities, the debate has intensified over whether we should place greater reliance on markets and less reliance on direct regulatory oversight. This study contributes to the debate by investigating the interaction between the market's pricing of bank equity securities and the regulatory examination process during the early stages of New England's banking crisis in the late 1980s and early 1990s. It addresses the concern that reducing regulatory oversight may adversely affect the market's ability to price bank securities effectively. The author finds that the bank examination process contributed significantly to the market's understanding of financial problems at New England banks. Bank examiners appear to have uncovered problems that bank management was unwilling to disclose publicly., since accounting performance measures were significantly different in exam quarters that resulted in supervisory downgrades than they were in all other quarters. In addition, market participants appeared to find this information useful, driving down stock prices in the quarter after the exam, the period when the poor performance measures associated with the exam are generally disclosed. The author suggests caution in considering market discipline as a substitute for regulatory oversight; the results of his study suggests it should more appropriately be considered as a complement.

Suggested Citation

  • John S. Jordan, 1999. "Pricing bank stocks: the contribution of bank examinations," New England Economic Review, Federal Reserve Bank of Boston, issue May, pages 39-53.
    • Handle: RePEc:fip:fedbne:y:1999:i:may:p:39-53
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    References listed on IDEAS

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    1. Flannery, Mark J. & Kwan, Simon H. & Nimalendran, M., 2004. "Market evidence on the opaqueness of banking firms' assets," Journal of Financial Economics, Elsevier, vol. 71(3), pages 419-460, March.
    2. Allen Berger & Sally Davies, 1998. "The Information Content of Bank Examinations," Journal of Financial Services Research, Springer;Western Finance Association, vol. 14(2), pages 117-144, October.
    3. Stephen Cross & Katerina Simons, 1991. "Do capital markets predict problems in large commercial banks?," New England Economic Review, Federal Reserve Bank of Boston, issue May, pages 51-56.
    4. Beverly Hirtle & Jose A. Lopez, 1999. "Supervisory information and the frequency of bank examinations," Economic Policy Review, Federal Reserve Bank of New York, vol. 5(Apr), pages 1-20.
    5. Donald P. Morgan, 1998. "Judging the risk of banks: what makes banks opaque?," Research Paper 9805, Federal Reserve Bank of New York.
    6. Flannery, Mark J & Houston, Joel F, 1999. "The Value of a Government Monitor for U.S. Banking Firms," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(1), pages 14-34, February.
    7. John S. Jordan & Joe Peek & Eric Rosengren, 1999. "Impact of greater bank disclosure amidst a banking crisis," Working Papers 99-1, Federal Reserve Bank of Boston.
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    Cited by:

    1. Allen N. Berger & Margaret K. Kyle & Joseph M. Scalise, 2001. "Did US Bank Supervisors Get Tougher during the Credit Crunch? Did They Get Easier during the Banking Boom? Did It Matter to Bank Lending?," NBER Chapters, in: Prudential Supervision: What Works and What Doesn't, pages 301-356, National Bureau of Economic Research, Inc.
    2. Hasan, Iftekhar & Jackowicz, Krzysztof & Jagiełło, Robert & Kowalewski, Oskar & Kozłowski, Łukasz, 2021. "Local banks as difficult-to-replace SME lenders: Evidence from bank corrective programs," Journal of Banking & Finance, Elsevier, vol. 123(C).
    3. Linda Allen & Julapa Jagtiani & James Moser, 2001. "Further Evidence on the Information Content of Bank Examination Ratings: A Study of BHC-to-FHC Conversion Applications," Journal of Financial Services Research, Springer;Western Finance Association, vol. 20(2), pages 213-232, October.
    4. Claudio Borio & Craig Furfine & Philip Lowe, 2001. "Procyclicality of the financial system and financial stability: issues and policy options," BIS Papers chapters, in: Bank for International Settlements (ed.), Marrying the macro- and micro-prudential dimensions of financial stability, volume 1, pages 1-57, Bank for International Settlements.

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    Keywords

    Bank stocks; bank examinations;

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