Market Discipline through Credit Ratings and Too‐Big‐to‐Fail in Banking

Sascha Kolaric, Florian Kiesel and Steven Ongena

Publications of Darmstadt Technical University, Institute for Business Studies (BWL) from Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute for Business Studies (BWL)

Abstract: Do credit ratings help enforce market discipline on banks? Analyzing a uniquely comprehensive data set consisting of 1,081 rating change announcements for 154 international financial institutions between January 2004 and December 2015, we find that rating downgrades for internal reasons, such as adverse changes in the operating performance or capital structure of banks, are associated with a significant credit default swap spread widening. However, this widening only occurs for banks that are not perceived as to be Too‐Big‐to‐Fail (TBTF). Our findings question the reliability of credit ratings as a tool to discipline TBTF banks and suggest that regulatory monitoring should remain the main mechanism for disciplining these banks.

Date: 2025-09-23
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Published in Journal of Money, Credit and Banking 2-3 (2025-09-23) : pp. 367-400

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https://tuprints.ulb.tu-darmstadt.de/29737
https://doi.org/10.1111/jmcb.12789

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Persistent link: https://EconPapers.repec.org/RePEc:dar:wpaper:157321

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