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Rating Banks: Risk and Uncertainty in an Opaque Industry

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Donald P. Morgan

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Abstract

The pattern of disagreement between bond raters suggests that banks and insurance firms are inherently more opaque than other types of firms. Moody's and S&P split more often over these financial intermediaries, and the splits are more lopsided, as theory here predicts. Uncertainty over the banks stems from certain assets, loans and trading assets in particular, the risks of which are hard to observe or easy to change. Banks' high leverage, which invites agency problems, compounds the uncertainty over their assets. These findings bear on both the existence and reform of bank regulation. (JEL G20, G21, G28)

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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 92 (2002)
Issue (Month): 4 (September)
Pages: 874-888
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Handle: RePEc:aea:aecrev:v:92:y:2002:i:4:p:874-888

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  1. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-29, May. [Downloadable!] (restricted)
  2. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October. [Downloadable!] (restricted)
  3. Richard Cantor & Frank Packer, 1994. "The credit rating industry," Quarterly Review, Federal Reserve Bank of New York, issue Sum, pages 1-26.
  4. O'Hara, Maureen & Shaw, Wayne, 1990. " Deposit Insurance and Wealth Effects: The Value of Being "Too Big to Fail."," Journal of Finance, American Finance Association, vol. 45(5), pages 1587-1600, December. [Downloadable!] (restricted)
  5. Stewart C. Myers & Raghuram G. Rajan, 1998. "The Paradox Of Liquidity," The Quarterly Journal of Economics, MIT Press, vol. 113(3), pages 733-771, August. [Downloadable!] (restricted)
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  6. Krasa, Stefan & Villamil, Anne P, 1992. "A Theory of Optimal Bank Size," Oxford Economic Papers, Oxford University Press, vol. 44(4), pages 725-49, October. [Downloadable!] (restricted)
  7. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Blackwell Publishing, vol. 51(3), pages 393-414, July. [Downloadable!] (restricted)
  8. Mark J. Flannery & Simon H. Kwan & M. Nimalendran, 1997. "Market evidence on the opaqueness of banking firms' assets," Proceedings, Federal Reserve Bank of Chicago, issue May, pages 470-485.
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  9. Peter C. Reiss, 1989. "Economic and Financial Determinants of Oil and Gas Exploration Activity," NBER Working Papers 3077, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  10. Demsetz, Rebecca S & Strahan, Philip E, 1997. "Diversification, Size, and Risk at Bank Holding Companies," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(3), pages 300-313, August.
  11. Bomberger, William A, 1996. "Disagreement as a Measure of Uncertainty," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(3), pages 381-92, August. [Downloadable!] (restricted)
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This page was last updated on 2009-11-16.

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