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Bank ratings: What determines their quality?

Harald Hau (), Sam Langfield () and David Marqués Ibañez
Authors registered in the RePEc Author Service: David Marques-Ibanez ()

No 9171, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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: conflicts of interest; credit ratings; prudential regulation; rating agencies; sovereign risk (search for similar items in EconPapers)
JEL-codes: E44 G21 G23 G28 (search for similar items in EconPapers)
Date: 2012-10
New Economics Papers: this item is included in nep-ban, nep-cba, nep-eec, nep-reg and nep-rmg
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Related works:
Journal Article: Bank ratings: what determines their quality? (2013) Downloads
Working Paper: Bank ratings-What determines their quality? (2012) Downloads
Working Paper: Bank Ratings: What Determines Their Quality? (2012) Downloads
Working Paper: Bank ratings: what determines their quality? (2012) Downloads
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