EU Banks Rating Assignments: Is there Heterogeneity between New and Old Member Countries?

Guglielmo Maria Caporale, Roman Matousek and Chris Stewart

No 1009, Discussion Papers of DIW Berlin from DIW Berlin, German Institute for Economic Research

Abstract: We model EU countries' bank ratings using financial variables and allowing for intercept and slope heterogeneity. Our aim is to assess whether "old" and "new" EU countries are rated differently and to determine whether "new" ones are assigned lower ratings, ceteris paribus, than "old" ones. We find that country-specific factors (in the form of heterogeneous intercepts) are a crucial determinant of ratings. Whilst "new" EU countries typically have lower ratings than "old" ones, after controlling for financial variables we also discover that all countries have significantly different intercepts, confirming our prior belief. This intercept heterogeneity suggests that each country's rating is assigned uniquely, after controlling for differences in financial factors, which may reflect differences in country risk and the legal and regulatory framework that banks face (such as foreclosure laws). In addition, we find that ratings may respond differently to the liquidity and operating expenses to operating income variables across countries. Typically ratings are more responsive to the former and less sensitive to the latter for "new" EU countries compared with "old" EU countries.

Keywords: EU countries; banks; ratings; ordered probit models; index of indicator variable (search for similar items in EconPapers)
JEL-codes: C25 C51 C52 G21 (search for similar items in EconPapers)
Pages: 24 p.
Date: 2010
New Economics Papers: this item is included in nep-ban, nep-cba, nep-eec, nep-eur and nep-tra
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Related works:
Journal Article: EU Banks Rating Assignments: Is There Heterogeneity between New and Old Member Countries? (2011)
Working Paper: EU Banks Rating Assignments: Is there Heterogeneity between New and Old Member Countries? (2010)
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