Multiple Ratings and Credit Standards: Differences of Opinion in the Credit Rating Industry

Federal Reserve Bank of New York Staff Reports, April 1996, No. 12

Posted: 26 Dec 1998

See all articles by Richard Cantor

Richard Cantor

Moody's Investors Service

Frank Packer

Bank for International Settlements (BIS)

Date Written: April 1996

Abstract

Rating-dependent financial regulators assume that the same letter ratings from different agencies imply the same levels of default risk. Most "third" agencies, however, assign significantly higher ratings on average than Moody's and Standard & Poor's. We show that, contrary to the claims of some rating industry professionals, sample selection bias can account for at most half of the observed average difference in ratings. We also investigate the economic rationale for using multiple rating agencies. Among the many variables considered, only size and bond-issuance history are consistently related to the probability of an issuer seeking third ratings. The probability ties to improve their standing under rating-dependent regulations.

JEL Classification: G11, G12, G20, G23

Suggested Citation

Cantor, Richard Martin and Packer, Frank, Multiple Ratings and Credit Standards: Differences of Opinion in the Credit Rating Industry (April 1996). Federal Reserve Bank of New York Staff Reports, April 1996, No. 12. Available at SSRN: https://ssrn.com/abstract=46910

Richard Martin Cantor (Contact Author)

Moody's Investors Service ( email )

99 Church Street
New York, NY 10007
United States

Frank Packer

Bank for International Settlements (BIS) ( email )

CH-4002 Basel, Basel-Stadt
Switzerland
4161 280 8449 (Phone)

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