A Market Based Measure of Credit Quality and Banks' Performance During the Subprime Crisis

M. Knaup, W.B. Wagner

Research output: Working paperDiscussion paperOther research output

Abstract

We propose a new method for measuring the quality of banks' credit portfolios. This method makes use of information impounded in bank share prices by exploiting differences in their sensitivity to credit default swap spreads of borrowers of varying quality. The method allows us to derive a credit risk indicator (CRI), which is the perceived share of high risk exposures in a bank' s portfolio. We estimate CRIs for the 150 largest U.S. bank holding companies and find that they have strong predictive power for the BHCs' performance during the subprime crisis, even after controlling for a variety of traditional asset quality proxies. Interestingly, we also find that the BHCs' aggregate CRI did not deteriorate since the beginning of the subprime crisis. This suggests that the market was aware of their (average) exposure to high risk credit.
Original languageEnglish
Place of PublicationTilburg
PublisherEBC
Number of pages32
Volume2009-06 S
DOIs
Publication statusPublished - 2009

Publication series

NameEBC Discussion Paper
Volume2009-06 S

Fingerprint

Subprime crisis
Bank performance
Credit
Credit risk
Share prices
Bank holding companies
Predictive power
Assets
Credit default swap (CDS) spreads
Risk exposure
Bank credit

Keywords

  • credit risk
  • asset quality
  • banks
  • subprime crisis

Cite this

Knaup, M., & Wagner, W. B. (2009). A Market Based Measure of Credit Quality and Banks' Performance During the Subprime Crisis. (EBC Discussion Paper; Vol. 2009-06 S). Tilburg: EBC. https://doi.org/10.2139/ssrn.1274815
Knaup, M. ; Wagner, W.B. / A Market Based Measure of Credit Quality and Banks' Performance During the Subprime Crisis. Tilburg : EBC, 2009. (EBC Discussion Paper).
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A Market Based Measure of Credit Quality and Banks' Performance During the Subprime Crisis. / Knaup, M.; Wagner, W.B.

Tilburg : EBC, 2009. (EBC Discussion Paper; Vol. 2009-06 S).

Research output: Working paperDiscussion paperOther research output

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