Bank Ratings: What Determines their Quality?
Economic Policy, Vol. 28(74) (April 2013), 289-333
with Sam Langfield and David Marques-Ibanez


This paper examines the quality of credit ratings assigned to banks by the three largest rating agencies. We interpret credit ratings as relative assessments of creditworthiness, and define a new ordinal metric of rating error based on banks’ expected default frequencies. Our results suggest that on average large banks receive more positive bank ratings, particularly from the agency to which the bank provides substantial securitization business. These competitive distortions are economically significant and contribute to perpetuate the existence of ‘too-big-to-fail’ banks. We also show that, overall, differential risk weights recommended by the Basel accords for investment grade banks bear no significant relationship to empirical default probabilities.

Additional Files

Powerpoint slides of a seminar presentation are available here.

The data used in this paper is available from the authors upon request.