The Influence of Institutional Factors on Excess Risk and Bank Ratings in Emerging Market Economies
21 Pages Posted: 14 Sep 2004
Date Written: January 2004
The regulatory and institutional environment may influence bank risk taking behavior, especially in emerging market economies. The resulting excess risk may hamper bank stability. This article investigates the influence of institutional factors on bank's excess risk and ratings, particularly Moody's Bank Financial Strength Rating (BFSR). Following the results of Poon et al. (1999) ("A Multivariate Analysis of the Determinants of Moody's Bank Financial Strength Ratings", Journal of International Financial Markets, Institutions and Money 9, pp. 267-283), we apply a two-step ordered logit model to a sample of rated banks in emerging markets. This methodology allows to distinguish the influence of the environment on excess risk from the impact of excess risk on the rating's quality. We find that this type of environment affects the quality of the rating, particularly the quality of the institutions, which influences the efficiency and the credibility of regulatory discipline and prudential supervision.
Keywords: Bank ratings, regulatory and institutional environment, emerging market economies, two step ordered logit model
JEL Classification: C35, G21, G28
Suggested Citation: Suggested Citation