You Can't Judge A Bank By Its Stock Price

Many economists believe the market is a good forecaster of what lies ahead for companies. Perhaps so, but in the case of troubled banks, it failed as a reliable early-warning system. That's the conclusion drawn from an analysis by economists Katerina Simons and Stephen Cross of the stock prices of 22 troubled bank holding companies from 1981 to 1987, which appears in the latest publication of the Federal Reserve Bank of Boston. Moreover, bank managers showed no systematic inclination to unload bank stock early on. Investors and management alike, say the authors, had to rely on bank examiners to sound the alarm that loan portfolios were deteriorating dramatically.

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