The use of accounting and stock market data to predict bank rating changes : the case of South East Asia

1
The use of accounting and stock market data to
predict bank rating changes the case of South
East Asia

• Isabelle DISTINGUIN
• Jocelyn TRINIDAD
• Amine TARAZI

• Issue and objective
• Emphasis on market forces in Basel II and
  indirect market discipline ? Can stock prices be
  useful for bank supervisors?
• How do accounting and market early indicators
  perform to predict rating changes ? Is there a
  specific contribution of market indicators
  compared to standard financial ratios?

2
Sample 64 banks from 8 countries of South East
Asia Period 1999-2004 Hong Kong, Korea,
Singapore, Taiwan, Malaysia, Indonesia, Thailand,
Philippines
Indicators - annual changes in accounting ratios
grouped into four categories (capital, asset
quality, earnings and liquidity) - market
indicators derived from weekly stock prices

• Method
• Multinomial logit model employed to estimate the
  probability of a rating change (prediction
  horizon of 1 year)
• Downgrades and Upgrades from 3 major rating
  agencies
• Stepwise to select the optimal set of indicators
• Test for possible influence of size and/or
  balance sheet structure of banks on the
  effectiveness of early indicators

3

• Results
• 1. Both accounting and market indicators perform
  better to predict Upgrades than Downgrades
• 2. For Large banks both types of indicators are
  significant in predicting Upgrades but not
  Downgrades (too-big-to-fail)
• For Small banks only market indicators can be
  useful in the early detection of Downgrades and
  Upgrades are not predictable
• 3. Early indicators are mainly significant to
  predict rating changes for banks heavily involved
  in traditional intermediation activities
  (deposits and loans)