Citation

Discussion Paper Details

Please find the details for DP9171 in an easy to copy and paste format below:

Full Details   |   Bibliographic Reference

Full Details

Title: Bank ratings: What determines their quality?

Author(s): Harald Hau, Sam Langfield and David Marqués Ibañez

Publication Date: October 2012

Keyword(s): conflicts of interest, credit ratings, prudential regulation, rating agencies and sovereign risk

Programme Area(s): Financial Economics

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.

For full details and related downloads, please visit: https://cepr.org/active/publications/discussion_papers/dp.php?dpno=9171

Bibliographic Reference

Hau, H, Langfield, S and Marqués Ibañez, D. 2012. 'Bank ratings: What determines their quality?'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=9171