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

65 Pages Posted: 7 Mar 2017 Last revised: 13 Apr 2018

Sascha Kolaric

Technische Universität Darmstadt

Florian Kiesel

Darmstadt University of Technology

Steven Ongena

University of Zurich - Department of Banking and Finance; KU Leuven; Centre for Economic Policy Research (CEPR)

Date Written: March 27, 2018

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 we 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 this widening only occurs 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 (March 27, 2018). Swiss Finance Institute Research Paper No. 17-09. Available at SSRN: https://ssrn.com/abstract=2928113 or http://dx.doi.org/10.2139/ssrn.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 R. G. Ongena

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

Schönberggasse 1
Zürich, 8001
Switzerland

KU Leuven ( email )

Oude Markt 13
Leuven, Vlaams-Brabant 3000
Belgium

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

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