Skip to main content

Can Bank Supervisors Rely on Market Data? A Critical Assessment from a Swiss Perspective


Market data, such as bond spreads or equity price volatility, are a complementary source to bank supervisory information. In Switzerland, meaningful market data are available for a number of banks which constitute a major part of the banking system. Notwithstanding some limitations (biases due to state guarantee for cantonal banks and potential ‘too-big-to-fail’ expectations for big banks) these market data are likely to play a supervisory role in the future. However, once the market expects supervisors to react to market data, these data become endogenous. This may jeopardize the very potential of market data to serve as policy guides.


  1. Bank for International Settlements (2006), BIS Quarterly Review, June.

  2. Basel Committee for Banking Supervision (2000), “Credit Ratings and Complementary Sources of Credit Quality Information”, Working Paper No. 3, August.

  3. Basel Committee for Banking Supervision (2003), “Markets for Bank Subordinated Debt and Equity in Basel Committee Member Countries”, Working Paper No. 12, August.

  4. Basel Committee for Banking Supervision (2005), “Basel II: International Convergence of Capital Measurement and Capital Standards: A Revised Framework”, November.

  5. Berger, Allen N., Sally M. Davies and Mark J. Flannery (2000), “Comparing Market and Supervisory Assessments of Bank Performance: Who Knows What When?”, Journal of Money, Credit, and Banking, 32 (3), pp. 641–667.

    Article  Google Scholar 

  6. Birchler, Urs W. and Diana Hancock (2003), “What Does the Yield on Subordinated Bank Debt Measure?”, Working Paper 2004-2, Swiss National Bank.

  7. Birchler, Urs W. and Andrea M. Maechler (2002), “Is there Market Discipline in Swiss Banks?”, in: George G. Kaufman (ed.), Research in Financial Services, Prompt Corrective Action in Banking: 10 Years Later, Volume 14, pp. 243–257.

  8. Board of Governors of the Federal Reserve System (1999), “Using Subordinated Debt as an Instrument of Market Discipline”, Staff Study 172.

  9. Bongini, Paola, Luc Laeven and Giovanni Majnoni (2002), “How Good is the Market at Assessing Bank Fragility? A Horse Race between Different Indicators”, Journal of Banking & Finance, 26 (5), pp. 1011–1028.

    Article  Google Scholar 

  10. Brewer, Eliah III, Hesna Genay, William Curt Hunter and George G. Kaufman (2003), “Does the Japanese Stock Market Price Bank-Risk? Evidence from Financial Firm Failures”, Journal of Money, Credit, and Banking, 35 (4), pp. 507–543.

    Article  Google Scholar 

  11. Brunnermeier, Markus M. (2001), Asset Pricing under Asymmetric Information, Oxford, UK.

  12. Calomiris, Charles W. (1999), “Building an Incentive-Compatible Safety Net”, Journal of Banking & Finance, 23 (10), pp. 1499–1519.

    Article  Google Scholar 

  13. Cannata, Francesco and Mario Quagliarello (2005), “The Value of Market Information in Banking Supervision: Evidence from Italy”, Journal of Financial Services Research, 27 (2), pp. 139–162.

    Article  Google Scholar 

  14. Crosbie, Peter J. and Jeffrey R. Bohn (2002), “Modeling Default Risk”, KMV LLC.

  15. Curry, Timothy, Peter J. Elmer and Gary S. Fissel (2003), “Using Market Information to Help Identify Distressed Institutions: A Regulatory Perspective”, FDIC Banking Review, 15 (3), pp. 1–16.

    Google Scholar 

  16. Demirgüç-Kunt, Asli and Harry Huizinga (2004), “Market Discipline and Deposit Insurance”, Journal of Monetary Economics, 51 (2), pp. 375–399.

    Article  Google Scholar 

  17. Dewatripont, Mathias and Jean Tirole (1994), The Prudential Regulation of Banks, Cambridge, MA.

  18. DeYoung, Robert, Mark J. Flannery, William W. Lang and Sorin M. Sorescu (2001), “The Information Content of Bank Exam Ratings and Subordinated Debt Prices”, Journal of Money, Credit, and Banking, 33 (4), pp. 900–925.

    Article  Google Scholar 

  19. Elton, Edwin J., Martin J. Gruber, Deepak Agrawal and Christopher Mann (2001), “Explaining the Rate Spread on Corporate Bonds”, Journal of Finance, 56 (1), pp. 247–277.

    Article  Google Scholar 

  20. Evanoff, Douglas D. and Larry D. Wall (2001), “SND Yield Spreads as Bank Risk Measures”, Journal of Financial Services Research, 20 (2/3), pp. 121–146.

    Article  Google Scholar 

  21. Evanoff, Douglas D. and Larry D. Wall (2002), “Measures of Riskiness of Banking Organizations: Subordinated Debt Yields, Risk-Based Capital, and Examination Ratings”, Journal of Banking & Finance, 26 (5), pp. 989–1009.

    Article  Google Scholar 

  22. Facchinetti, Matteo (2007), “The Prospects of Market Discipline for Banks. Evidence from the Swiss Bond Market”, mimeo.

  23. Fan, Rong, Joseph G. Haubrich, Peter Ritchken and James B. Thomson (2003), “Getting the Most out of a Mandatory Subordinated Debt Requirement”, Journal of Financial Services Research, 24 (2/3), pp. 149–179.

    Article  Google Scholar 

  24. Flannery, Mark J (1998), “Using Market Information in Prudential Bank Supervision: A Review of the U.S. Empirical Evidence”, Journal of Money, Credit, and Banking, 30 (3), pp. 273–305.

    Article  Google Scholar 

  25. Flannery, Mark J. and Sorin M. Sorescu (1996), “Evidence of Bank Market Discipline in Subordinated Debenture Yields: 1983–1991”, Journal of Finance, 51 (4), pp. 1347–1377.

    Google Scholar 

  26. Greenspan, Alan (2001), “Harnessing Market Discipline”, The Region: Banking and Policy Issues Magazine, Federal Reserve Bank of Minneapolis, September.

  27. Gropp, Reint, Jukka Vesala and Giuseppe Vulpes (2006): “Equity and Bond Market Signals as Leading Indicators of Bank Fragility”, Journal of Money, Credit, and Banking, 38 (2), pp. 399–428.

    Article  Google Scholar 

  28. Gropp, Reint, Marco Lo Duca and Jukka Vesala (2006), “Bank Contagion in Europe”, ECB Working Paper No. 662, European Central Bank.

  29. Gunther, Jeffery W., Mark E. Levonian and Robert R. Moore (2001), “Can the Stock Market Tell Bank Supervisors Anything They Don’t Already Know?”, Federal Reserve Bank of Dallas Economic and Financial Review (2nd Quarter), pp. 2–9.

  30. Hancock, Diana and Myron L. Kwast (2001), “Using Subordinated Debt to Monitor Bank Holding Companies: Is It Feasible?”, Journal of Financial Services Research, 19 (2/3), pp. 147–187.

    Article  Google Scholar 

  31. Hanschel, Elke K. and Pierre Monnin (2004), “Measuring and Forecasting Stress in the Banking Sector. Evidence from Switzerland”, mimeo.

  32. Hanschel, Elke K. and Pierre Monnin (2005), “Measuring and Forecasting Stress in the Banking Sector: Evidence from Switzerland”, in: Investigating the relationship between the financial and real economy, BIS Papers No. 22, April.

  33. Hayek, Friedrich A. (1945), “The Use of Knowledge in Society”, American Economic Review, 35 (4), pp. 519–530.

    Google Scholar 

  34. Illing, Mark and Ying Liu (2003), “An Index of Financial Stress for Canada”, Working Paper 2003-14, Bank of Canada.

  35. Krainer, John, and Jose A. Lopez (2001), “Incorporating Equity Market Information into Supervisory Monitoring Models”, Journal of Money, Credit, and Banking, 36 (6), pp. 1043–1067.

    Article  Google Scholar 

  36. Lengwiler, Yvan (2004), Microfoundations of Financial Assets: An Introduction to General Equilibrium Asset Pricing, Princeton, NJ and Oxford, UK.

  37. Merton, Robert C. (1974), “On the Pricing of Corporate Debt: The Risk Structure of Interest Rates”, Journal of Finance, 29 (2), pp. 449–470.

    Google Scholar 

  38. Morris, Stephen and Hyun Song Shin (2002), “The Social Value of Public Information”, American Economic Review, 92 (5), pp. 1521–1534.

    Article  Google Scholar 

  39. O’Hara, Maureen (1995), Market Microstructure Theory, Cambridge, MA.

  40. Persson, Mattias (2002), “Stock Market Indicators of Bank Fragility — Evidence from the Nordic Banking Crisis”, Working Paper, Sveriges Riksbank.

  41. Pop, Adrian (2006): “Market Discipline in International Banking Regulation: Keeping the Playing Field Level”, Journal of Financial Stability, 2 (3), pp. 286–310.

    Article  Google Scholar 

  42. Rhode, Paul W. and Koleman S. Strumpf (2004), “Historical Presidential Betting Markets”, Journal of Economic Perspectives, 18 (2), pp. 127–142.

    Article  Google Scholar 

  43. Rime, Bertrand (2005), “Too Big to Fail”, The Financial Regulator, 10 (3), pp. 46–51.

    Google Scholar 

  44. Shiller, Robert J. (2000), Irrational Exuberance, Princeton, NJ.

  45. Shin, Hyun Song (2002), Comments on “How Good Is the Market at Assessing Bank Fragility? A Horse Race between Different Indicators”, Journal of Banking & Finance 26 (5), pp. 1029–1031.

    Article  Google Scholar 

  46. Shleifer, Andrew (2000), Inefficient Markets: An Introduction to Behavioral Finance, Oxford, UK.

  47. Sironi, Andrea (2001), “An Analysis of European Banks Subordinated Debt Issues and Its Implications for a Mandatory Subordinated Debt Policy”, Journal of Financial Services Research, 20 (2/3), pp. 233–266.

    Article  Google Scholar 

  48. Sironi, Andrea (2002), “Strengthening Banks’ Market Discipline and Leveling the Playing Field: Are the Two Compatible?”, Journal of Banking & Finance, 26 (5), pp. 1065–1091.

    Article  Google Scholar 

  49. Sironi, Andrea (2003), “Testing for Market Discipline in the European Banking Industry: Evidence from Subordinated Debt Issues”, Journal of Money, Credit, and Banking, 35 (3), pp. 443–472.

    Article  Google Scholar 

  50. Swidler, Steve and James A. Wilcox (2002), “Information about Bank Risk in Options Prices”, Journal of Banking & Finance, 26 (5), pp. 1033–1057.

    Article  Google Scholar 

  51. Swiss National Bank (2006), Financial Stability Report.

  52. Sy, Amadou N.R. (2002), “Emerging Market Bond Spreads and Sovereign Credit Ratings: Reconciling Market Views with Economic Fundamentals”, Emerging Markets Review, 3 (4), pp. 380–408.

    Article  Google Scholar 

  53. Wolfers, Justin and Eric Zitzewitz (2004), “Prediction Markets”, Journal of Economic Perspectives, 18 (2), pp. 107–126.

    Article  Google Scholar 

Download references

Author information



Corresponding author

Correspondence to Urs W. Birchler.

Additional information

The opinions expressed in this paper do not necessarily reflect those of the Swiss National Bank or its staff. For helpful comments we are indebted to Jeannette Henggeler-Müller, Pierre Monnin and several other colleagues at the Swiss National Bank, as well as to two anonymous referees.

Rights and permissions

Reprints and Permissions

About this article

Cite this article

Birchler, U.W., Facchinetti, M. Can Bank Supervisors Rely on Market Data? A Critical Assessment from a Swiss Perspective. Swiss J Economics Statistics 143, 95–132 (2007).

Download citation


  • Market Discipline
  • Banking Supervision
  • Switzerland


  • G14
  • G21
  • G28