We examine whether two commonly used indicators of bank fragility, the subordinated debt spread and KMV’s distance to default, yield signals in line with supervisors’ interests. We argue that supervisors would prefer indicators that are strictly increasing in earnings, and decreasing in...

This paper links banking with asset prices in a monetary macroeconomic model. The main innovation is to consider how falling asset prices affect the banking system through wide-spread borrower default, while deriving explicit solutions and balance sheet effects even far from the steady state. We...