R. Alton Gilbert, Andrew P. Meyer and Mark D. Vaughan
In recent years, policymakers in the Basel countries have begun exploring strategies for harnessing financial markets to contain bank risk. As part of this effort, we measure the potential contribution of jumbo CD yields and runoff (withdrawals) to off-site surveillance. Specifically, we rank banks with satisfactory supervisory ratings by default premiums, quarterly withdrawals, and CAMELS-downgrade probability (as estimated with an econometric model designed to benchmark current practices). Then, we compare performance of these rankings counterfactually over a series of out-of-sample windows running from 1992 to 2005. We find that jumbo CD signals would not have flagged banks missed by the CAMELS-downgrade model or reduced uncertainty about banks flagged by the model. We also find that jumbo CD signals would not have provided earlier warning about developing problems in banks flagged by this model. When viewed with other recent research, these findings suggest more work is needed before market signals can make a material contribution to off-site surveillance.
Amanda L. Kramer
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