The information content of bank exam ratings and subordinated debt prices

Do supervisory examinations of large commercial banking firms produce useful information not already reflected in market prices? To investigate this question, we apply a new research methodology to data on bank exam ratings and the subordinated debt risk spreads of their parent holding companies. We find that government exams do produce new, value-relevant information; that debenture prices do not immediately reflect this information; and that the market prices the likely regulatory actions implied by this information. These results have implications for market versus regulatory discipline at large banking firms, and for proposals to make subordinated debt mandatory for these firms.