Comparing Market and Supervisory Assessments of Bank Performance: Who Knows What When?

Abstract

This paper compares the timeliness and accuracy of (confidential) government assessments of bank condition against market evaluations of large U.S. bank holding companies. We find that supervisors and bond rating agencies both acquire some information that would help the other group forecast changes in bank condition. In contrast, supervisory assessments and equity market indicators are not strongly interrelated. Furthermore, supervisory assessments are generally less accurate than either stock or bond market indicators in predicting future changes in performance, except when those assessments derive from a recent on-site inspection visit. To some extent, these findings are consistent with the various parties' differing incentives. ALL CORPORATIONS OPERATE under governance systems