Second, history suggests that, at least in the latest crisis, they would have given far timelier signals of impending stress, and so a better guide to prompt corrective action, ahead of the crisis cliff-edge being reached. To illustrate that, Charts 6–8 look at the three market-based measures of solvency for the 33-bank panel, again broken down between “crisis” and “no crisis” banks. There is now clear blue water between the solvency ratios of the crisis and non-crisis banks, with the second materially weaker. In the two years prior to the Lehman Brothers crisis, the average marketbased capital ratio was around 5 percentage points lower for crisis than for no crisis banks. Second, market-based measures of capital offered clear advance signals of impending distress. For example, the market-based capital ratio of crisis banks began to fall in April 2007, well over a year ahead of the Lehmans crisis. To formalise that visual impression, Table 1 shows Type I and II errors for the three market-based capital measures. These now  8  Cannata and Quagliariello (2005), Gunther et al (2001), Krainer and Lopez (2004). 9  Berger et al (2000). 10  Calomiris and Herring (2011) prefer a variant of the first measure. 11  Largely, because even marked-based measures of solvency will rely on disclosures by banks, which will themselves be model-dependent to some degree. BIS central bankers’ speeches  5  comfortably outperform a coin toss. Replacing the book value of capital with its market value lowers errors by a half, often much more.
(b) Timely conversion is defined as a bank’s ratio falling below the trigger level no less than one month and no more than one year before a “crisis”. The number in this column is the proportion of “crisis” banks for which timely conversion does not occur (i,e, there is a Type II error) at this trigger level. (c) For each metric, the threshold for a signal of impending distress is as given in Charts 5 to 8. 18  BIS central bankers’ speeches