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Rating Assignments: Lessons from International Banks

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Author Info
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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Publisher Info
Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number CESifo Working Paper No. 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;

Find related papers by JEL classification:
C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models
C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation and Testing
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages

References listed on IDEAS
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  1. David T. Llewellyn, 2008. "The Northern Rock crisis: a multi-dimensional problem waiting to happen," Journal of Financial Regulation and Compliance, Emerald Group Publishing, vol. 1(1), pages 35-58, February. [Downloadable!] (restricted)
  2. Kolari, James & Glennon, Dennis & Shin, Hwan & Caputo, Michele, 2002. "Predicting large US commercial bank failures," Journal of Economics and Business, Elsevier, vol. 54(4), pages 361-387. [Downloadable!] (restricted)
  3. David T. Llewellyn, 2008. "The Northern Rock crisis: a multi-dimensional problem waiting to happen," Proceedings, Federal Reserve Bank of Chicago, issue May, pages 58-82.
  4. Kamstra, Mark & Kennedy, Peter & Suan, Teck-Kin, 2001. "Combining Bond Rating Forecasts Using Logit," The Financial Review, Eastern Finance Association, vol. 36(2), pages 75-96, May.
    Other versions:
  5. Altman, Edward I. & Saunders, Anthony, 2001. "An analysis and critique of the BIS proposal on capital adequacy and ratings," Journal of Banking & Finance, Elsevier, vol. 25(1), pages 25-46, January. [Downloadable!] (restricted)
  6. Altman, Edward I. & Bharath, Sreedhar T. & Saunders, Anthony, 2002. "Credit ratings and the BIS capital adequacy reform agenda," Journal of Banking & Finance, Elsevier, vol. 26(5), pages 909-921, May. [Downloadable!] (restricted)
  7. David F. Hendry & Carlos Santos, 2004. "Regression Models with Data-based Indicator Variables," Economics Papers 2004-W04, Economics Group, Nuffield College, University of Oxford. [Downloadable!]
    Other versions:
  8. Altman, Edward I. & Rijken, Herbert A., 2004. "How rating agencies achieve rating stability," Journal of Banking & Finance, Elsevier, vol. 28(11), pages 2679-2714, November. [Downloadable!] (restricted)
  9. Meyer, Paul A & Pifer, Howard W, 1970. "Prediction of Bank Failures," Journal of Finance, American Finance Association, vol. 25(4), pages 853-68, September. [Downloadable!] (restricted)
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