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Working Paper

On Credit Spread Slopes and Predicting Bank Risk

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We examine whether credit-spread curves, engendered by a mandatory subordinated-debt requirement for banks, would help predict bank risk. We extract the credit-spread curves each quarter for each bank in our sample, and analyze the information content of credit-spread slopes. We find that credit-spread slopes are significant predictors of future credit spreads. However, credit-spread slopes do not provide significant additional information on future bank-risk variables, over and above other bank-specific and market-wide information.
11.14.2003ISSN 2573-7953 WP 03-14DOI 10.26509/frbc-wp-200314
Keywords credit-spread curves, credit-spread slopes, bank risk
JEL Classification Codes G28, G12, G18

Working Papers of the Federal Reserve Bank of Cleveland are preliminary materials circulated to stimulate discussion and critical comment on research in progress. They may not have been subject to the formal editorial review accorded official Federal Reserve Bank of Cleveland publications. The views expressed in this paper are those of the authors and do not represent the views of the Federal Reserve Bank of Cleveland or the Federal Reserve System.

Suggested Citation

Krishnan, C.N.V., Peter Ritchken, and James B. Thomson. 2003. “On Credit Spread Slopes and Predicting Bank Risk.” Federal Reserve Bank of Cleveland, Working Paper No. 03-14. https://doi.org/10.26509/frbc-wp-200314