Year: 2006
Type: article
Abstract: We analyse the ability of the distance to default and subordinated bond spreads to signal bank fragility in a sample of EU banks. We find leading properties for both indicators. The distance to default exhibits lead times of 6-18 months. Spreads have signal value close to problems only. We also find that implicit safety nets weaken the predictive power of spreads. Further, the results suggest complementarity between both indicators. We also examine the interaction of the indicators with other information and find that their additional information content may be small but not insignifi- cant. The results suggest that market indicators reduce type II errors relative to predictions based on accounting information only.
Authors: Reint Gropp, Jukka Vesala, Giuseppe Vulpes
Institutions: European Central Bank, Federal Reserve Bank of Boston
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: bronze
OpenAlex ID: W3124943232