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Bank ratings-What determines their quality?

  • 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)

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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File URL: http://www.bangor.ac.uk/business/research/documents/BBSWP12012.pdf
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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
Contact details of provider: Postal: Gwynedd LL57 2DG
Phone: +44 (0) 1248 383648
Web page: http://www.bangor.ac.uk/business/research/

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  1. Patrick Bolton & Xavier Freixas & Joel Shapiro, 2010. "The credit ratings game," Economics Working Papers 1221, Department of Economics and Business, Universitat Pompeu Fabra.
  2. Mathis, Jérôme & McAndrews, James & Rochet, Jean-Charles, 2009. "Rating the raters: Are reputation concerns powerful enough to discipline rating agencies?," Journal of Monetary Economics, Elsevier, vol. 56(5), pages 657-674, July.
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  22. Cole, Rebel A. & White, Lawrence J., 2010. "Déjà vu all over again: The causes of U.S. commercial bank failures this time around," MPRA Paper 24690, University Library of Munich, Germany, revised 28 Jul 2010.
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  25. Berger, Allen N. & Bouwman, Christa H.S., 2013. "How does capital affect bank performance during financial crises?," Journal of Financial Economics, Elsevier, vol. 109(1), pages 146-176.
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  27. Matthias Efing, 2013. "Bank Capital Regulation with an Opportunistic Rating Agency," CESifo Working Paper Series 4267, CESifo Group Munich.
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