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

76 Pages Posted: 7 Mar 2017 Last revised: 9 Aug 2019

See all articles by Sascha Kolaric

Sascha Kolaric

Technische Universität Darmstadt

Florian Kiesel

Grenoble Ecole de Management

Steven Ongena

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

Date Written: August 5, 2019

Abstract

Do credit ratings help enforce market discipline on banks? Analyzing a uniquely comprehensive dataset consisting of 1,081 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 banks, are associated with a significant CDS spread widening. However, this widening only occurs for banks that are not perceived as to be Too-Big-to-Fail (TBTF). Our findings question the reliability of credit ratings as a tool to discipline TBTF banks and suggest that 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 R. G., Market Discipline through Credit Ratings and Too-Big-to-Fail in Banking (August 5, 2019). 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

Grenoble Ecole de Management ( email )

12 Rue Pierre Semard
Grenoble, Cedex 01 38000
France

Steven R. G. Ongena

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

Schönberggasse 1
Zürich, 8001
Switzerland

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

KU Leuven ( email )

Oude Markt 13
Leuven, Vlaams-Brabant 3000
Belgium

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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