Research Discussion Papers, Bank of Finland
No 15/2012:
Predicting rating changes for banks: How accurate are accounting and stock market indicators?
Isabelle Distinguin, Iftekhar Hasan ()
and Amine Tarazi
Abstract: We aim to assess how accurately accounting and stock
market indicators predict rating changes for Asian banks. We conduct a
stepwise process to determine the optimal set of early indicators by
tracing upgrades and downgrades from rating agencies, as well as other
relevant factors. Our results indicate that both accounting and market
indicators are useful leading indicators but are more effective in
predicting upgrades than downgrades, especially for large banks. Moreover,
early indicators are only significant in predicting rating changes for
banks that are more focused on traditional banking activities such as
deposit and loan activities. Finally, a higher reliance of banks on
subordinated debt is associated with better accuracy of early
indicators.
Keywords: bank failure; bank risk; ratings; emerging market; (follow links to similar papers)
JEL-Codes: G21; G28; (follow links to similar papers)
34 pages, April 12, 2012
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