Credit Ratings and Bank Affiliation to Financial Holding Companies: Effects of Government Ownership and Financial Crisis

Chung-Hua Shen, Jun-Guo Shi and Yu-Li Huang

Emerging Markets Finance and Trade, 2017, vol. 53, issue 5, 1045-1071

Abstract: This study compares credit ratings between FHC affiliated banks and independent banks using Taiwan bank and FHC data. The results show banks that join Insurance- or Security-FHCs obtain better ratings than those that join Bank-FHCs. Second, banks that join FHCs with higher activity diversification can obtain better credit ratings. Third, joining government-owned FHCs enhances bank credit ratings and mitigates bank default risk compared to joining non-government-owned FHCs. Fourth, prior to the financial crisis, banks joining FHCs can obtain better credit ratings and reduce the cost of debt. However, during the financial crisis, rating agencies stopped regarding banks joining privately owned bank-based FHCs as risk diversification and assigning better credit ratings on this basis.

Date: 2017
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DOI: 10.1080/1540496X.2016.1255941

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