Bank Ratings: What Determines Their Quality?

42 Pages Posted: 1 Oct 2012

See all articles by Harald Hau

Harald Hau

University of Geneva - Geneva Finance Research Institute (GFRI); Swiss Finance Institute; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute)

Sam Langfield

European Central Bank

David Marques-Ibanez

European Central Bank (ECB)

Multiple version iconThere are 3 versions of this paper

Date Written: September 30, 2012

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.

Keywords: Rating Agencies, Credit Ratings, Conflicts of Interest, Prudential Regulation

JEL Classification: G21, G23, G28

Suggested Citation

Hau, Harald and Langfield, Sam and Marques-Ibanez, David, Bank Ratings: What Determines Their Quality? (September 30, 2012). Swiss Finance Institute Research Paper No. 12-31, Available at SSRN: https://ssrn.com/abstract=2154793 or http://dx.doi.org/10.2139/ssrn.2154793

Harald Hau (Contact Author)

University of Geneva - Geneva Finance Research Institute (GFRI) ( email )

40 Boulevard du Pont d'Arve
Geneva 4, Geneva 1211
Switzerland

Swiss Finance Institute

Switzerland

Centre for Economic Policy Research (CEPR)

London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Sam Langfield

European Central Bank ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

David Marques-Ibanez

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
49 6913 44 6460 (Phone)
49 6913 44 6460 (Fax)

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