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Market discipline through credit ratings and Too-Big-To-Fail in banking


Ongena, Steven; Kolaric, Sascha; Kiesel, Florian (2020). Market discipline through credit ratings and Too-Big-To-Fail in banking. Swiss Finance Institute Research Paper 17-09, University of Zurich.

Abstract

Do credit ratings help enforce market discipline on banks? Analyzing a uniquely comprehensive dataset 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 CDS 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.

Abstract

Do credit ratings help enforce market discipline on banks? Analyzing a uniquely comprehensive dataset 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 CDS 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.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Language:English
Date:1 January 2020
Deposited On:04 Dec 2020 09:29
Last Modified:05 Dec 2020 04:37
Series Name:Swiss Finance Institute Research Paper
OA Status:Green
Free access at:Official URL. An embargo period may apply.
Official URL:https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2928113
Other Identification Number:merlin-id:18764

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