Despite the substantial improvement in the bank stock market since last summer, that market continues to signal difficulties for many institutions. While the mean of values has risen, so too has the volatility of values around the mean, reflecting continued investor confusion and concern over the health of the financial sector.

The KMV Corp. of San Francisco has built a model, perhaps the best in its class, that assesses default probabilities. The model measures the amount of negative equity volatility required to depress the value of any given bank's assets to the point where it just equals the amount of the current debt, which is the point of default.

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