Asymmetric Benchmarking in Bank Credit Rating

Abstract

This study proposes an information asymmetry hypothesis to examine why bank credit ratings vary among countries even when bank financial ratios remain constant. Countries are divided among those with low and high information asymmetry. The former include high-income countries, those in North America and West Europe regions, and those with strong institutional environment quality, whereas the latter group possess the opposite characteristics. This study hypothesizes that the influences of financial ratios on ratings are enhanced in low information asymmetry countries but reduced in countries with high information asymmetry. The sample includes the long-term credit ratings issued by Standard and Poor's from 86 countries during 2002-2008. The estimated results show that the effects of financial ratios on ratings are significantly affected by information asymmetries. Countries wishing to improve the credit ratings of their banks thus should reduce information asymmetry.

Capital structure and performance of Middle East and North Africa (MENA) banks: an assessment of credit rating

“…On the other hand, Kemper (2011) finding shows that credit rating is not a first order concern of capital structure decisions, and that the model does not hold through the different classes of credit rating. However, Shen et al (2012) find that the effects between credit rating on capital structure persist significantly in the context of trade-off and pecking order theory.…”

CAMELS Model With a Proposed ‘S’ for the Bank Credit Risk Rating

“…The reduced number of research on modeling and forecasting the BCRR (Salvador et al, 2014) concerned mainly the "stand-alone" ratings: «Bank Financial Strength Ratings "BFSR"» of Moody"s (Poon, Firth, & Fung, 1999;Laruccia & Revoltella, 2000;Peresetsky & Karminsky, 2011;Ö güt, Doğanay, Ceylan, &Aktaş, 2012 andSalvador et al, 2014) et «Bank Viability Rating "BVR"» (previously called "Individual Rating "IR"") of FitchRatings (Hammer, Kogan, &Lejeune, 2012 andSalvador et al, 2014). Since 2011, researchers have started to be interested in the "all-in" ratings (Van Laere & Baesens, 2011;Bissoondoyal-Bheenick & Treepongkaruna, 2011;Peresetsky & Karminsky, 2011;Chen, 2012;Van Laere, Vantieghem, & Baesens, 2012;Shen, Huang, & Hasan, 2012;Orsenigo & Vercellis, 2013;Salvador et al, 2014 andGogas, Papadimitriou, &Agrapetidou, 2014). The issuing ratings used by Pagratis and Stringa (2009)…”

“…The second way is to go with a relatively smaller set of variables over factors predefined based on previous studies and use the methods of analysis directly on these variables (Pagratis & Stringa, 2009;Van Laere & Baesens, 2011;Bissoondoyal-Bheenick & Treepongkaruna, 2011;Peresetsky & Karminsky, 2011;Chen, 2012;Van Laere et al, 2012;Shen et al, 2012;Salvador et al, 2014;Gogas et al, 2014). Some studies have used the stepwise procedure to select the best model (Laruccia & Revoltella, 2000;Godlewski, 2004;Van Laere & Baesens, 2011;Van Laere et al, 2012;Distinguin, Hasan, & Tarazi, 2013;and Gogas et al, 2014).…”

“…The unanimous result is that approximately two thirds of the ratings can be expected on the basis of a reduced number of financial and accounting statistics publicly available (Shen et al, 2012). But none of this work has addressed the question of the determinants of the BCRR after the completion of the revision of the methodology in response to one of the most deeply moving crises in the financial world, the sub-prime crisis.…”

“…Estrella, Park and Peristiani (2002) showed that the information provided by the bank credit ratings is correlated to those provided by the capital ratios. Several authors (Shen et al, 2012;Salvador et al, 2014; for example) have found that well-capitalized banks have a better probability of getting a high rating.…”