Accounting and Market-based measures

Question 1

What are accounting-based measures?

Answer 1

• derive from financial statements and provide a historical perspective
• examples include return on assets (ROA), return on equity (ROE), and Net Interest Margin (NIM)

Question 2

What are market-based measures?

Answer 2

investors’ perspectives and the bank’s current conditions, often offering forward-looking insights
-e.g. stock prices, market capitalization, and credit default measure

Question 3

benefits of accounting-based measures

Answer 3

-detailed and comprehensive view of a bank’s financial health
- eg ROA and ROE can indicate how efficiently a bank is utilizing its assets and equity to generate profits
- NIM reflects the profitably of the bank’s core lending activities

Question 4

Disadvantages of accounting-based measures

Answer 4

• Backward-looking and may not fully capture a bank’s current or future risk profile
• These policies can be influenced by accounting policies and management’s discretion

Question 5

Advantages of Market-based measures

Answer 5

• offer different perspectives by reflecting real-time market sentiment
• stock prices and market capitalization provide insights into how investors value the bank
• CDS spreads measure the cost of insuring against the bank’s default, offering an indication of perceived credit risk

Question 6

Disadvantages of Market-based measures

Answer 6

• highly volatile and influenced by market sentiment
• not always rational or based in fundamentals
• fluctuation during financial rises or market turbulence
• speculation and market manipulation susceptibility

Question 7

When to use what?

Answer 7

Best case is using both
- stable economic conditions = accounting-based
- uncertainty = more timely and relevant insights