Credit Ratings as Indicators of Implicit Government Support for Global Systemically Important Banks
9 Pages Posted: 1 Jun 2013
Date Written: May 31, 2013
Abstract
We examine the assertion that ratings from the ratings agencies that explicitly assume governmental support for Global Systemically Important Banks (G-SIBs) translate into lower spreads and a funding cost advantage for those G-SIBs. We analyze whether the market over the past 14 years in fact has priced U.S. bank holding company bonds, credit default swaps, and equity based on issuer ratings that assume such support; we do so by comparing market implied ratings to issuer ratings. We observe for G-SIBs that market implied ratings are 2-3 notches more conservative than issuer ratings. In comparison, we find that for non-G-SIBs that the market implied ratings are closer to the issuer ratings. We also note that the market implied ratings for G-SIBs track the standalone, unsupported ratings more closely than they do the ratings which have built-in implicit government support and thus we conclude that market data discounts the notion of government support for G-SIBs.
Keywords: Too Big To Fail, TBTF, Global Systemically Important Banks, Government support, Credit ratings, Market Implied Ratings
JEL Classification: G18, G21, G28, E44
Suggested Citation: Suggested Citation