ISEG 2S | Bank ratings: What determines their quality?

Speaker: Harald Hau
Swiss Finance Institute

Presentation: Bank ratings: What determines their quality?

Jointly with: Lisbon Finance Seminars

Abstract
This paper examines the quality of credit ratings assigned to banks by the three largest rating agencies. 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 on average large banks receive more positive bank ratings, particularly from the agency to which the bank provides substantial securitization business. These competitive distortions are economically significant and contribute to 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.

ORGANIZING TEAM
This seminars series is organized by Margarida Abreu (ECO), Raquel M. Gaspar (FIN/MG) and Isabel Proença (QM).

MEETING THE SPEAKER All speakers are available to meet faculty at ISEG during the afternoon after the talk. Slots are limited. To book your time with the speaker, contact one of the coordination team members.

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