Credit Ratings as Coordination Mechanisms

Boot, Arnoud W. A.; Milbourn, Todd T.; Schmeits, Anjolein

doi:10.1093/rfs/hhj009

Cited by 412 publications

(212 citation statements)

References 47 publications

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“…This approach, known as "throughthe-cycle" methodology, ensures that agencies maintain the stability of ratings and avoid rating reversals. 4 In their model, Boot, Milbourn, and Schmeits (2006) show that rating agencies play an important role as a coordinating mechanism in the economy where multiple equilibria can exist. Sufi (2009) also provides evidence for the real effects of debt certification.…”

Section: Introductionmentioning

confidence: 99%

Structural Shifts in Credit Rating Standards

Alp

2013

The Journal of Finance

177

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I examine the time‐series variation in corporate credit rating standards from 1985 to 2007. A divergent pattern exists between investment‐grade and speculative‐grade rating standards from 1985 to 2002 as investment‐grade standards tighten and speculative‐grade loosen. In 2002, a structural shift occurs toward more stringent ratings. Holding characteristics constant, firms experience a drop of 1.5 notches in ratings due to tightened standards from 2002 to 2007. Credit spread tests suggest that the variation in standards is not completely due to changes in the economic climate. Rating standards affect credit spreads. Loose ratings are associated with higher default rates.

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Section: Introductionmentioning

confidence: 99%

Structural Shifts in Credit Rating Standards

Alp

2013

The Journal of Finance

177

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“…The viability of banks in their off-balance sheet activities (e.g., writing guarantees as in underwriting and securitization) necessitates sufficient capitalization and high credit ratings (see Boot, Milbourn and Schmeits (2005) for a general analysis of the raison d'être of credit ratings).…”

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confidence: 99%

The Competitive Challenge in Banking

Boot¹,

Schmeits²

2006

Advances in Corporate Finance and Asset Pricing

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The increasingly competitive environment poses challenges to bankers. This paper emphasizes relationship banking as a prime source of the banks' comparative advantage. The proliferation of transaction-oriented banking (trading and financial market activities) does however seriously challenge relationship banking.Competition from financial markets may well destabilize (traditional) durable relationships. However, we argue that, contrary to what many believe, banks may optimally respond by increasing relationship-specific investments. These observations echo the insights generated by fundamental research in the area of financial intermediation, and seem consistent with banks' recent strategic choices. We subsequently analyze the implications for the competitive positioning of banks. To this end, we discuss the rationales and empirical evidence regarding the recent consolidation and conglomeration trend in the financial sector, and the implications for both the industrial structure and the optimal internal organization of banks. We also discuss the potential disaggregation of the value chain via joint ventures or outsourcing.JEL Classification: G20, G21

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“…Thus, incorporating these considerations has an effect similar to a reduction in the accuracy of (exogenously generated) ratings. 6 Important considerations include the role of CRA reputation and moral hazard (Mathis, McAndrews, and Rochet (2009), Bar-Isaac and Shapiro (2013), Fulghieri, Strobl, and Xia (2014), Goel and Thakor (2015), Kashyap and Kovrijnykh (2015)), feedback effects and ratings as coordination devices (Boot, Milbourn, and Schmeits (2006), Manso (2013), Goldstein and Huang (2017)), and the implications of rating-contingent regulation (Opp, Opp, and Harris (2013), Josephson and Shapiro (2019)). 7 See http://faculty.haas.berkeley.edu/bgreen/files/RatingsWP2017.pdf.…”

Section: Related Theoretical Literaturementioning

confidence: 99%

Securitization, Ratings, and Credit Supply

Daley¹,

Green²,

Vanasco

2019

The Journal of Finance

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We develop a framework to explore the effect of credit ratings on loan origination. We show that ratings endogenously shift the economy from a signaling equilibrium, in which banks inefficiently retain loans to signal quality, toward an originate‐to‐distribute equilibrium with zero retention and inefficiently low lending standards. Ratings increase overall efficiency, provided that the reduction in costly retention more than compensates for the origination of some negative net present value loans. We study how banks' ability to screen loans affects these predictions and use the model to analyze commonly proposed policies such as mandatory “skin in the game.”

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Credit Ratings as Coordination Mechanisms

Cited by 412 publications

References 47 publications

Structural Shifts in Credit Rating Standards

Structural Shifts in Credit Rating Standards

The Competitive Challenge in Banking

Securitization, Ratings, and Credit Supply

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