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Rating Assignments: Lessons from International Banks

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  • Guglielmo Maria Caporale
  • Roman Matousek
  • Chris Stewart

Abstract

This paper estimates ordered logit and probit regression models for bank ratings which also include a country index to capture country-specific variation. The empirical findings provide support to the hypothesis that the individual international bank ratings assigned by Fitch Ratings are underpinned by fundamental quantitative financial analyses. Also, there is strong evidence of a country effect. Our model is shown to provide accurate predictions of bank ratings for the period prior to the 2007 – 2008 banking crisis based upon publicly available information. However, our results also suggest that quantitative models are not likely to be able to predict ratings with complete accuracy. Furthermore, we find that both quantitative models and rating agencies are likely to produce highly inaccurate predictions of ratings during periods of financial instability.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2009/wp-cesifo-2009-04/cesifo1_wp2618.pdf
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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2618.

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Date of creation: 2009
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Handle: RePEc:ces:ceswps:_2618

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Related research

Keywords: international banks; ratings; ordered choice models; country index;

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References

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  1. David F. Hendry & Carlos Santos, 2004. "Regression Models with Data-based Indicator Variables," Economics Papers 2004-W13, Economics Group, Nuffield College, University of Oxford.
  2. Kamstra, Mark & Kennedy, Peter, 1998. "Combining qualitative forecasts using logit," International Journal of Forecasting, Elsevier, Elsevier, vol. 14(1), pages 83-93, March.
  3. Amato, Jeffery D. & Furfine, Craig H., 2004. "Are credit ratings procyclical?," Journal of Banking & Finance, Elsevier, Elsevier, vol. 28(11), pages 2641-2677, November.
  4. Jackson, John D. & Boyd, James W., 1988. "A statistical approach to modeling the behavior of bond raters," Journal of Behavioral Economics, Elsevier, Elsevier, vol. 17(3), pages 173-193.
  5. Pinches, George E & Mingo, Kent A, 1973. "A Multivariate Analysis of Industrial Bond Ratings," Journal of Finance, American Finance Association, American Finance Association, vol. 28(1), pages 1-18, March.
  6. Reinhart, Carmen & Levich, Richard & Majoni, Giovanni, 2002. "Ratings, rating agencies and the global financial system: Summary and policy implications," MPRA Paper 13249, University Library of Munich, Germany.
  7. Altman, Edward I. & Rijken, Herbert A., 2004. "How rating agencies achieve rating stability," Journal of Banking & Finance, Elsevier, Elsevier, vol. 28(11), pages 2679-2714, November.
  8. Kolari, James & Glennon, Dennis & Shin, Hwan & Caputo, Michele, 2002. "Predicting large US commercial bank failures," Journal of Economics and Business, Elsevier, Elsevier, vol. 54(4), pages 361-387.
  9. Ederington, Louis H, 1985. "Classification Models and Bond Ratings," The Financial Review, Eastern Finance Association, Eastern Finance Association, vol. 20(4), pages 237-62, November.
  10. David F. Hendry, 2001. "Modelling UK inflation, 1875-1991," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 16(3), pages 255-275.
  11. Feng, D. & Gourieroux, C. & Jasiak, J., 2008. "The ordered qualitative model for credit rating transitions," Journal of Empirical Finance, Elsevier, Elsevier, vol. 15(1), pages 111-130, January.
  12. Altman, Edward I. & Bharath, Sreedhar T. & Saunders, Anthony, 2002. "Credit ratings and the BIS capital adequacy reform agenda," Journal of Banking & Finance, Elsevier, Elsevier, vol. 26(5), pages 909-921, May.
  13. Stefanescu, Catalina & Tunaru, Radu & Turnbull, Stuart, 2009. "The credit rating process and estimation of transition probabilities: A Bayesian approach," Journal of Empirical Finance, Elsevier, Elsevier, vol. 16(2), pages 216-234, March.
  14. Altman, Edward I. & Saunders, Anthony, 2001. "An analysis and critique of the BIS proposal on capital adequacy and ratings," Journal of Banking & Finance, Elsevier, Elsevier, vol. 25(1), pages 25-46, January.
  15. Kamstra, Mark & Kennedy, Peter & Suan, Teck-Kin, 2001. "Combining Bond Rating Forecasts Using Logit," The Financial Review, Eastern Finance Association, Eastern Finance Association, vol. 36(2), pages 75-96, May.
  16. Donald P. Morgan, 2002. "Rating Banks: Risk and Uncertainty in an Opaque Industry," American Economic Review, American Economic Association, American Economic Association, vol. 92(4), pages 874-888, September.
  17. Giuliano Iannotta, 2006. "Testing for Opaqueness in the European Banking Industry: Evidence from Bond Credit Ratings," Journal of Financial Services Research, Springer, Springer, vol. 30(3), pages 287-309, December.
  18. David T. Llewellyn, 2008. "The Northern Rock crisis: a multi-dimensional problem waiting to happen," Journal of Financial Regulation and Compliance, Emerald Group Publishing, Emerald Group Publishing, vol. 16(1), pages 35-58, February.
  19. Meyer, Paul A & Pifer, Howard W, 1970. "Prediction of Bank Failures," Journal of Finance, American Finance Association, American Finance Association, vol. 25(4), pages 853-68, September.
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Cited by:
  1. Guglielmo Maria Caporale & Roman Matousek & Chris Stewart, 2011. "EU Banks Rating Assignments: Is There Heterogeneity between New and Old Member Countries?," Review of International Economics, Wiley Blackwell, vol. 19(1), pages 189-206, 02.
  2. Williams, Gwion & Alsakka, Rasha & ap Gwilym, Owain, 2013. "The impact of sovereign rating actions on bank ratings in emerging markets," Journal of Banking & Finance, Elsevier, Elsevier, vol. 37(2), pages 563-577.

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