Credit Ratings and Bank Monitoring Ability

59 Pages Posted: 11 Jun 2010 Last revised: 22 Jun 2016

See all articles by Leonard I. Nakamura

Leonard I. Nakamura

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Kasper Roszbach

Norges Bank - Research Department; University of Groningen - Faculty of Economics and Business

Multiple version iconThere are 3 versions of this paper

Date Written: May 14, 2013

Abstract

In this paper, the authors use credit rating data from two Swedish banks to elicit evidence on banks' loan monitoring ability. They test the banks' ability to forecast credit bureau ratings, and vice versa, and show that bank ratings are able to predict future credit bureau ratings. This is evidence that bank credit ratings, consistent with theory, contain valuable private information. However, the authors also find that public ratings have an ability to predict future bank ratings, implying that internal bank ratings do not fully or efficiently incorporate all publicly available information. This suggests that risk analysis by banks or regulators should be based on both internal bank ratings and public ratings. They also document that the credit bureau ratings add information to the bank ratings in predicting bankruptcy and loan default. The methods the authors use represent a new basket of straightforward techniques that enables both financial institutions and regulators to assess the performance of credit ratings systems.

Keywords: Monitoring, banks, credit bureau, private information, ratings, regulation, supervision

JEL Classification: D82, G18, G21, G24, G32, G33

Suggested Citation

Nakamura, Leonard I. and Roszbach, Kasper F., Credit Ratings and Bank Monitoring Ability (May 14, 2013). FRB of Philadelphia Working Paper No. 10-21 (Superseded by Working Paper 13-21). Available at SSRN: https://ssrn.com/abstract=1622831 or http://dx.doi.org/10.2139/ssrn.1622831

Leonard I. Nakamura (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States
215-574-3804 (Phone)
215-574-4364 (Fax)

Kasper F. Roszbach

Norges Bank - Research Department ( email )

P.O. Box 1179
Oslo, N-0107
Norway

University of Groningen - Faculty of Economics and Business ( email )

Department of Economics, Econometrics and Finance
Nettelbosje 2
Groningen, NL 9747 AE
Netherlands

HOME PAGE: http://www.rug.nl/staff/k.f.roszbach/

Register to save articles to
your library

Register

Paper statistics

Downloads
137
Abstract Views
1,306
rank
57,082
PlumX Metrics