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Bank ratings-What determines their quality?

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Author Info

  • Harald Hau

    (University of Geneva, Swiss Finance Institute and CEPR)

  • Sam Langfield

    (European Systemic Risk Board Secretariat and UK Financial Services Authority)

  • David Marques-Ibanez

    (European Central Bank)

Abstract

This paper examines the quality of credit ratings assigned to banks in Europe and the United States by the three largest rating agencies over the past two decades. We interpret credit ratings as relative assessments of creditworthiness, and define a new ordinal metric of rating error based on banks’ expected default frequencies. Our results suggest that rating agencies assign more positive ratings to large banks and to those institutions more likely to provide the rating agency with additional securities rating business (as indicated by private structured credit origination activity). These competitive distortions are economically significant and help perpetuate the existence of ‘too-big-to-fail’ banks. We also show that, overall, differential risk weights recommended by the Basel accords for investment grade banks bear no significant relationship to empirical default probabilities.

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Bibliographic Info

Paper provided by Bangor Business School, Prifysgol Bangor University (Cymru / Wales) in its series Working Papers with number 12012.

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Length: 42 pages
Date of creation: Oct 2012
Date of revision:
Handle: RePEc:bng:wpaper:12012

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Keywords: Rating Agencies; Credit Ratings; Conflicts of Interest; Prudential Regulation;

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References

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  1. Mariathasan, Mike & Merrouche, Ouarda, 2013. "The Manipulation of Basel Risk-Weights," CEPR Discussion Papers, C.E.P.R. Discussion Papers 9494, C.E.P.R. Discussion Papers.
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Citations

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Cited by:
  1. Tigran Poghosyan & Charlotte Werger & Jakob de Haan, 2014. "Size and support ratings of US banks," DNB Working Papers, Netherlands Central Bank, Research Department 434, Netherlands Central Bank, Research Department.
  2. David G. Mayes & Hanno Stremmel, 2014. "The Effectiveness of Capital Adequacy Measures in Predicting Bank Distress," SUERF Studies, SUERF - The European Money and Finance Forum, SUERF - The European Money and Finance Forum, number 2014/1, July.
  3. Reinhart, Carmen M. & Rogoff, Kenneth S., 2009. "The Aftermath of Financial Crises," Scholarly Articles 11129155, Harvard University Department of Economics.
  4. Jeon, Doh-Shin & Lovo, Stefano, 2013. "Credit Rating Industry: a Helicopter Tour of Stylized Facts and Recent Theories," TSE Working Papers, Toulouse School of Economics (TSE) 13-376, Toulouse School of Economics (TSE).
  5. Mariathasan, Mike & Merrouche, Ouarda, 2013. "The Manipulation of Basel Risk-Weights," CEPR Discussion Papers, C.E.P.R. Discussion Papers 9494, C.E.P.R. Discussion Papers.
  6. Jeon, Doh-Shin & Lovo, Stefano, 2013. "Credit Rating Industry: a Helicopter Tour of Stylized Facts and Recent Theories," IDEI Working Papers, Institut d'Économie Industrielle (IDEI), Toulouse 762, Institut d'Économie Industrielle (IDEI), Toulouse.
  7. Jeon, Doh-Shin & Lovo, Stefano, 2013. "Credit rating industry: A helicopter tour of stylized facts and recent theories," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 31(5), pages 643-651.
  8. Oana Toader, 2014. "Quantifying and Explaining Implicit Public Guarantees for European Banks," Working Papers, HAL halshs-01015376, HAL.

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