The Impact of Government Ownership on Banks’ Ratings: Evidence from the European Banking Industry

Abstract

We evaluate the impact of government ownership on the issuer and individual ratings of a sample of 224 large European banks over the 1999-2004 period. Individual ratings differ from traditional ones in that they focus on banks’ economic and financial conditions and do not take into account any external support from banks’ owners, local or national governments, monetary authorities or other official institutions. Two main results emerge from our analysis. First, after controlling for accounting variables, government-owned banks have a better average issuer rating than privately owned ones, indicating that government-owned banks benefit from a lower cost of debt funding. Second, privately-owned banks have a lower risk of insolvency, as reflected in a better individual rating, than government-owned banks. This result, which remains even after controlling for banks’ economic and financial conditions, indicates that government-owned banks benefit from a government protection mechanism in the form of explicit and/or implicit guarantees.

Keywords: European banking, Ownership, Market Discipline, Credit Ratings

JEL Classification: G15, G21, G28, G32