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Keywords:

  • Distance to default;
  • Subordinated notes and debentures;
  • Market discipline;
  • Bank risk
  • G21;
  • G32

Abstract

The recent financial crisis has highlighted the inadequacy of present supervisory arrangements to identify reliable ex-ante indicators of banking distress. For a sample of US bank holding companies, we analyse the extent to which distance to default based on market data can be explained using accounting-based indicators of risk. We show that a larger number of bank fundamentals help predict default for institutions that issue subordinated debt. For banks that issue sub-debt, we find that higher charter values and low bank capitalizations further increase the power of bank fundamentals to predict default risk.