Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/152584
Authors: 
Gropp, Reint
Vesala, Jukka
Vulpes, Giuseppe
Year of Publication: 
2002
Series/Report no.: 
ECB Working Paper 150
Abstract: 
We analyse the ability of the distance-to-default and bond spreads to signal bank fragility. We show that both indicators are complete and unbiased and that spreads are non-linear in the probability of bank default. We empirically test these properties in a sample of EU banks. We find leading properties for both indicators. The distance-to-default exhibits lead times of 6 to 18 months. Spreads have signal value close to default only, in line with the theory. We also find that implicit safety nets weaken the predictive power of spreads. Further, the results suggest complementarity between both indicators, reducing type I errors. We also examine the interaction of the indicators with other bank information.
Subjects: 
Bank fragility
banking
Market Indicators
JEL: 
G21
G12
Document Type: 
Working Paper

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