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Multiple ratings and credit standards: differences of opinion in the credit rating industry

  • Richard Cantor
  • Frank Packer

Rating-dependent financial regulators assume that the same letter ratings from different agencies imply the same levels of default risk. Most "third" agencies, however, assign significantly higher ratings on average than Moody's and Standard & Poor's. We show that, contrary to the claims of some rating industry professionals, sample selection bias can account for at most half of the observed average difference in ratings. We also investigate the economic rationale for using multiple rating agencies. Among the many variables considered, only size and bond-issuance history are consistently related to the probability of an issuer seeking third ratings. The probability ties to improve their standing under rating-dependent regulations.

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Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 12.

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Date of creation: 1996
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Handle: RePEc:fip:fednsr:12
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