[go: up one dir, main page]
IDEAS home Printed from https://ideas.repec.org/a/ijc/ijcjou/y2020q3a3.html
   My bibliography  Save this article

Bank Standalone Credit Ratings

Author

Listed:
  • Michael R. King

    (Gustavson School of Business, University of Victoria)

  • Steven Ongena

    (University of Zurich, Swiss Finance Institute, KU Leuven, and CEPR)

  • Nikola Tarashev

    (Bank for International Settlements)

Abstract
Standalone ratings measure a bank's intrinsic financial strength but-unlike all-in ratings-do not incorporate potential sovereign or parent-bank support. On July 20, 2011, Fitch switched from a 9-point to a 21-point scale for its standalone ratings but did not alter its all-in ratings. We investigate if the stock market reacted to this refinement of public information about bank fundamentals. We find that shareholders rewarded (penalized) banks that received positive (negative) rating surprises. We also find that Fitch used the refinement to inflate standalone ratings, in particular for large banks, banks with low 9-point standalone ratings, and banks headquartered outside North America.

Suggested Citation

  • Michael R. King & Steven Ongena & Nikola Tarashev, 2020. "Bank Standalone Credit Ratings," International Journal of Central Banking, International Journal of Central Banking, vol. 16(4), pages 101-144, September.
    • Handle: RePEc:ijc:ijcjou:y:2020:q:3:a:3
    as

    Download full text from publisher

    File URL: http://www.ijcb.org/journal/ijcb20q3a3.pdf
    Download Restriction: no
    File URL: http://www.ijcb.org/journal/ijcb20q3a3.htm
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Sironi, Andrea, 2003. "Testing for Market Discipline in the European Banking Industry: Evidence from Subordinated Debt Issues," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(3), pages 443-472, June.
    2. Flannery, Mark J. & Kwan, Simon H. & Nimalendran, M., 2004. "Market evidence on the opaqueness of banking firms' assets," Journal of Financial Economics, Elsevier, vol. 71(3), pages 419-460, March.
    3. Doherty, Neil A. & Kartasheva, Anastasia V. & Phillips, Richard D., 2012. "Information effect of entry into credit ratings market: The case of insurers' ratings," Journal of Financial Economics, Elsevier, vol. 106(2), pages 308-330.
    4. Skreta, Vasiliki & Veldkamp, Laura, 2009. "Ratings shopping and asset complexity: A theory of ratings inflation," Journal of Monetary Economics, Elsevier, vol. 56(5), pages 678-695, July.
    5. Patrick Bolton & Xavier Freixas & Joel Shapiro, 2012. "The Credit Ratings Game," Journal of Finance, American Finance Association, vol. 67(1), pages 85-112, February.
    6. Hirtle, Beverly, 2006. "Stock Market Reaction to Financial Statement Certification by Bank Holding Company CEOs," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(5), pages 1263-1291, August.
    7. Randall Kroszner, 2016. "A Review of Bank Funding Cost Differentials," Journal of Financial Services Research, Springer;Western Finance Association, vol. 49(2), pages 151-174, June.
    8. Eduardo Cavallo & Andrew Powell & Roberto Rigobon, 2013. "Do Credit Rating Agencies Add Value? Evidence From The Sovereign Rating Business," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 18(3), pages 240-265, July.
    9. Jie (Jack) He & Jun (Qj) Qian & Philip E. Strahan, 2012. "Are All Ratings Created Equal? The Impact of Issuer Size on the Pricing of Mortgage-Backed Securities," Journal of Finance, American Finance Association, vol. 67(6), pages 2097-2137, December.
    10. Tang, Tony T., 2009. "Information asymmetry and firms' credit market access: Evidence from Moody's credit rating format refinement," Journal of Financial Economics, Elsevier, vol. 93(2), pages 325-351, August.
    11. Christina E. Bannier & Patrick Behr & Andre Güttler, 2010. "Rating opaque borrowers: why are unsolicited ratings lower?," Review of Finance, European Finance Association, vol. 14(2), pages 263-294.
    12. Emmanuel Farhi & Josh Lerner & Jean Tirole, 2013. "Fear of rejection? Tiered certification and transparency," RAND Journal of Economics, RAND Corporation, vol. 44(4), pages 610-631, December.
    13. Ueda, Kenichi & Weder di Mauro, B., 2013. "Quantifying structural subsidy values for systemically important financial institutions," Journal of Banking & Finance, Elsevier, vol. 37(10), pages 3830-3842.
    14. Antoine Faure‐Grimaud & Eloïc Peyrache & Lucía Quesada, 2009. "The ownership of ratings," RAND Journal of Economics, RAND Corporation, vol. 40(2), pages 234-257, June.
    15. Mathis, Jérôme & McAndrews, James & Rochet, Jean-Charles, 2009. "Rating the raters: Are reputation concerns powerful enough to discipline rating agencies?," Journal of Monetary Economics, Elsevier, vol. 56(5), pages 657-674, July.
    16. Andrew Cohen & Mark D. Manuszak, 2013. "Ratings Competition in the CMBS Market," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45, pages 93-119, August.
    17. John M. Griffin & Jordan Nickerson & Dragon Yongjun Tang, 2013. "Rating Shopping or Catering? An Examination of the Response to Competitive Pressure for CDO Credit Ratings," The Review of Financial Studies, Society for Financial Studies, vol. 26(9), pages 2270-2310.
    18. Arnoud W. A. Boot & Todd T. Milbourn & Anjolein Schmeits, 2006. "Credit Ratings as Coordination Mechanisms," The Review of Financial Studies, Society for Financial Studies, vol. 19(1), pages 81-118.
    19. Becker, Bo & Milbourn, Todd, 2011. "How did increased competition affect credit ratings?," Journal of Financial Economics, Elsevier, vol. 101(3), pages 493-514, September.
    20. Efing, Matthias & Hau, Harald, 2015. "Structured debt ratings: Evidence on conflicts of interest," Journal of Financial Economics, Elsevier, vol. 116(1), pages 46-60.
    21. Stephen Morris, 2001. "Political Correctness," Journal of Political Economy, University of Chicago Press, vol. 109(2), pages 231-265, April.
    22. Miles Livingston & Andy Naranjo & Lei Zhou, 2007. "Asset Opaqueness and Split Bond Ratings," Financial Management, Financial Management Association International, vol. 36(3), pages 49-62, September.
    23. Doron Kliger & Oded Sarig, 2000. "The Information Value of Bond Ratings," Journal of Finance, American Finance Association, vol. 55(6), pages 2879-2902, December.
    24. Harald Hau & Sam Langfield & David Marques-Ibanez, 2013. "Bank ratings: what determines their quality? [Bank risk during the financial crisis: do business models matter?]," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 28(74), pages 289-333.
    25. Hand, John R M & Holthausen, Robert W & Leftwich, Richard W, 1992. "The Effect of Bond Rating Agency Announcements on Bond and Stock Prices," Journal of Finance, American Finance Association, vol. 47(2), pages 733-752, June.
    26. Ricardo Correa & Kuan‐Hui Lee & Horacio Sapriza & Gustavo A. Suarez, 2014. "Sovereign Credit Risk, Banks' Government Support, and Bank Stock Returns around the World," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 46(s1), pages 93-121, February.
    27. Hirth, Stefan, 2014. "Credit rating dynamics and competition," Journal of Banking & Finance, Elsevier, vol. 49(C), pages 100-112.
    28. Bar-Isaac, Heski & Shapiro, Joel, 2013. "Ratings quality over the business cycle," Journal of Financial Economics, Elsevier, vol. 108(1), pages 62-78.
    29. Demirgüç-Kunt, Asli & Huizinga, Harry, 2010. "Bank activity and funding strategies: The impact on risk and returns," Journal of Financial Economics, Elsevier, vol. 98(3), pages 626-650, December.
    30. John M. Griffin & Dragon Yongjun Tang, 2012. "Did Subjectivity Play a Role in CDO Credit Ratings?," Journal of Finance, American Finance Association, vol. 67(4), pages 1293-1328, August.
    31. Dimitrov, Valentin & Palia, Darius & Tang, Leo, 2015. "Impact of the Dodd-Frank act on credit ratings," Journal of Financial Economics, Elsevier, vol. 115(3), pages 505-520.
    32. Flannery, Mark J, 1998. "Using Market Information in Prudential Bank Supervision: A Review of the U.S. Empirical Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 30(3), pages 273-305, August.
    33. Slovin, Myron B. & Sushka, Marie E. & Polonchek, John A., 1999. "An analysis of contagion and competitive effects at commercial banks," Journal of Financial Economics, Elsevier, vol. 54(2), pages 197-225, October.
    34. Jones, Jeffrey S. & Lee, Wayne Y. & Yeager, Timothy J., 2012. "Opaque banks, price discovery, and financial instability," Journal of Financial Intermediation, Elsevier, vol. 21(3), pages 383-408.
    35. Frank Packer & Nikola Tarashev, 2011. "Rating methodologies for banks," BIS Quarterly Review, Bank for International Settlements, June.
    36. Ederington, Louis H. & Goh, Jeremy C., 1998. "Bond Rating Agencies and Stock Analysts: Who Knows What When?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 33(4), pages 569-585, December.
    37. Goel, Anand M. & Thakor, Anjan V., 2015. "Information reliability and welfare: A theory of coarse credit ratings," Journal of Financial Economics, Elsevier, vol. 115(3), pages 541-557.
    38. Giuliano Iannotta, 2006. "Testing for Opaqueness in the European Banking Industry: Evidence from Bond Credit Ratings," Journal of Financial Services Research, Springer;Western Finance Association, vol. 30(3), pages 287-309, December.
    39. Donald P. Morgan, 2002. "Rating Banks: Risk and Uncertainty in an Opaque Industry," American Economic Review, American Economic Association, vol. 92(4), pages 874-888, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Patrycja Chodnicka-Jaworska, 2016. "Credit Ratings Inflation Phenomenon – Are There Any Diffrences in the Credit Ratings Determinants? (Zjawisko inflacji credit ratingow – czy wystepuja roznice w determinantach credit ratingow?)," Research Reports, University of Warsaw, Faculty of Management, vol. 2(22), pages 48-59.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Valentina Bruno & Jess Cornaggia & Kimberly J. Cornaggia, 2016. "Does Regulatory Certification Affect the Information Content of Credit Ratings?," Management Science, INFORMS, vol. 62(6), pages 1578-1597, June.
    2. Farkas, Miklós, 2021. "Competition, communication and rating bias," Journal of Economic Behavior & Organization, Elsevier, vol. 189(C), pages 637-656.
    3. Xia, Han, 2014. "Can investor-paid credit rating agencies improve the information quality of issuer-paid rating agencies?," Journal of Financial Economics, Elsevier, vol. 111(2), pages 450-468.
    4. Vink, Dennis & Nawas, Mike & van Breemen, Vivian, 2021. "Security design and credit rating risk in the CLO market," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 72(C).
    5. Chen, Yongmin & Gu, Dingwei & Yao, Zhiyong, 2013. "Rating Inflation versus Deflation: On Procyclical Credit Ratings," MPRA Paper 51159, University Library of Munich, Germany.
    6. Efing, Matthias & Hau, Harald, 2015. "Structured debt ratings: Evidence on conflicts of interest," Journal of Financial Economics, Elsevier, vol. 116(1), pages 46-60.
    7. Jess N. Cornaggia & Kimberly J. Cornaggia & John E. Hund, 2017. "Credit Ratings Across Asset Classes: A Long-Term Perspective," Review of Finance, European Finance Association, vol. 21(2), pages 465-509.
    8. Francesco Sangiorgi & Chester Spatt, 2017. "Opacity, Credit Rating Shopping, and Bias," Management Science, INFORMS, vol. 63(12), pages 4016-4036, December.
    9. Chen, Zhongfei & Matousek, Roman & Stewart, Chris & Webb, Rob, 2019. "Do rating agencies exhibit herding behaviour? Evidence from sovereign ratings," International Review of Financial Analysis, Elsevier, vol. 64(C), pages 57-70.
    10. Sean Flynn & Andra Ghent, 2018. "Competition and Credit Ratings After the Fall," Management Science, INFORMS, vol. 64(4), pages 1672-1692, April.
    11. Vu, Huong & Alsakka, Rasha & ap Gwilym, Owain, 2022. "Does competition improve sovereign credit rating quality?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 76(C).
    12. Cornaggia, Jess & Cornaggia, Kimberly J. & Xia, Han, 2016. "Revolving doors on Wall Street," Journal of Financial Economics, Elsevier, vol. 120(2), pages 400-419.
    13. Bae, Kee-Hong & Driss, Hamdi & Roberts, Gordon S., 2019. "Does competition affect ratings quality? Evidence from Canadian corporate bonds," Journal of Corporate Finance, Elsevier, vol. 58(C), pages 605-623.
    14. Nelson Camanho & Pragyan Deb & Zijun Liu, 2022. "Credit rating and competition," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(3), pages 2873-2897, July.
    15. Jeon, Doh-Shin & Lovo, Stefano, 2013. "Credit rating industry: A helicopter tour of stylized facts and recent theories," International Journal of Industrial Organization, Elsevier, vol. 31(5), pages 643-651.
    16. Sumit Agarwal & Vincent Y. S. Chen & Weina Zhang, 2016. "The Information Value of Credit Rating Action Reports: A Textual Analysis," Management Science, INFORMS, vol. 62(8), pages 2218-2240, August.
    17. Bakalyar, Inna & Galil, Koresh, 2014. "Rating shopping and rating inflation in Israel," International Review of Financial Analysis, Elsevier, vol. 33(C), pages 270-280.
    18. Nguyen, Quan M.P. & Do, Hung Xuan & Molchanov, Alexander & Nguyen, Lily & Nguyen, Nhut H., 2023. "Political similarities in credit ratings," International Review of Financial Analysis, Elsevier, vol. 86(C).
    19. Milidonis, Andreas, 2013. "Compensation incentives of credit rating agencies and predictability of changes in bond ratings and financial strength ratings," Journal of Banking & Finance, Elsevier, vol. 37(9), pages 3716-3732.
    20. Mariano, Beatriz, 2012. "Market power and reputational concerns in the ratings industry," Journal of Banking & Finance, Elsevier, vol. 36(6), pages 1616-1626.

    More about this item

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ijc:ijcjou:y:2020:q:3:a:3. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Bank for International Settlements (email available below). General contact details of provider: https://www.ijcb.org/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.