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Market Discipline through Credit Ratings and Too-Big-to-Fail in Banking

60 Pages Posted: 7 Mar 2017 Last revised: 13 Sep 2017

Sascha Kolaric

Technische Universität Darmstadt

Florian Kiesel

Darmstadt University of Technology

Steven Ongena

University of Zurich - Department of Banking and Finance; Swiss Finance Institute

Date Written: September 11, 2017

Abstract

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

Kolaric, Sascha and Kiesel, Florian and Ongena, Steven, Market Discipline through Credit Ratings and Too-Big-to-Fail in Banking (September 11, 2017). Swiss Finance Institute Research Paper No. 17-09. Available at SSRN: https://ssrn.com/abstract=2928113

Sascha Kolaric (Contact Author)

Technische Universität Darmstadt ( email )

Hochschulstrasse 1
Darmstadt, 64289
Germany

HOME PAGE: http://www.cofi.wi.tu-darmstadt.de/team_cofi/wimi_cofi/kolaric_cofi/index.en.jsp

Florian Kiesel

Darmstadt University of Technology ( email )

Hochschulstrasse 1
Darmstadt, 64289
Germany

Steven Ongena

University of Zurich - Department of Banking and Finance ( email )

Schönberggasse 1
Zürich, 8001
Switzerland

Swiss Finance Institute ( email )

Quartier UNIL-Dorigny, Bâtiment Extranef, # 211
40, Bd du Pont-d'Arve
CH-1015 Lausanne, CH-6900
Switzerland

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