Market Discipline through Credit Ratings and Too-Big-to-Fail in Banking
60 Pages Posted: 7 Mar 2017 Last revised: 13 Sep 2017
Date Written: September 11, 2017
Do credit ratings help enforce market discipline on banks? Analyzing a uniquely comprehensive dataset consisting of 1,117 rating change announcements for 154 international financial institutions between January 2004 and December 2015 find that rating downgrades for internal reasons, such as adverse changes in the operating performance or capital structure of the banks, are associated with a significant CDS spread widening, but only for banks that are not perceived to be Too-Big-to-Fail (TBTF). Our findings question the reliability of credit ratings as a tool to discipline TBTF banks and suggests regulatory monitoring should remain the main mechanism for disciplining these banks.
Keywords: Credit Ratings, CDS, Too-Big-To-Fail
JEL Classification: G21, G13, G14
Suggested Citation: Suggested Citation