The impact of bank regulations, supervision, market structure, and bank characteristics on individual bank ratings: A cross-country analysis

Abstract

We use country level data and bank level data from 71 countries and 857 banks to investigate the impact of bank regulations, supervision, market structure, and bank characteristics on individual bank ratings. The results indicate that less cost efficient banks, with higher than average levels of provisions relatively to their income, and lower liquidity tend to have lower ratings. Larger and more profitable banks tend to obtain higher ratings. Higher equity to assets ratio results in higher ratings only when we do not control for bank supervision and regulations. Capital requirements, restrictions on bank activities, official disciplinary power, explicit deposit insurance scheme, higher deposit insurer power, liquidity and diversification guidelines, entry requirements, fraction of entries denied, and economic freedom have a significant impact on ratings in all of our specifications. Disclosure requirements and foreign banks entry have a significant impact on ratings only when we simultaneously control for the regulatory environment and the market structure, while auditing requirements have a significant impact only when we control for the regulatory environment alone. Finally, banks in developed countries are assigned higher ratings. However, this impact disappears when we include the regulatory and supervision variables in the models. © 2006 Springer Science + Business Media, LLC

The impact of banking regulations on banks' cost and profit efficiency: Cross-country evidence

“…Beck et al (2006a) find that empowerment of private monitoring assists efficient corporate finance and has a positive effect on the integrity of bank lending in countries with sound legal institutions. Demirguc-Kunt et al (2008) show that the reporting of regular and accurate financial data to regulators and market participants results in sounder banks; however Pasiouras et al (2006) find a negative relationship between credit ratings and disclosure requirements (though this is significant only at the 10% level and not robust across their specifications). Finally, Barth et al (2004a) indicate that there is no evidence that regulations that foster private monitoring reduce the likelihood of suffering major banking crises.…”

“…In contrast, Fernandez and Gonzalez (2005) find that stricter restrictions on bank activities are effective at reducing banking risk, although they argue that this is mitigated by higher information disclosure and auditing requirements. Lower restrictions on bank activities have also been associated with higher credit ratings (Pasiouras et al, 2006), although Pasiouras (2008) finds no significant association with technical efficiency.…”

“…Finally, Barth et al (2004a) indicate that there is no evidence that regulations that foster private monitoring reduce the likelihood of suffering major banking crises. With respect to the power of supervisors, evidence suggests that it is associated with higher levels of nonperforming loans (Barth et al, 2002), it can be harmful to bank development (Barth et al, 2003b) and it is also negatively associated with overall bank soundness (Pasiouras et al, 2006). Finally, Barth et al (2004a) summarize several theoretical reasons for restricting bank activities as well as alternative reasons for allowing banks to participate in a broad range of activities.…”

“…At the international level, Barth et al (2004a) investigate the effect of a broad range of regulatory and supervisory measures on bank stability, development and performance, while Demirguc-Kunt et al (2006) and Pasiouras et al (2006) study the effect of similar measures on banks' overall soundness, as measured by credit ratings. Similarly, other studies have examined the effect of regulations on banking sector crisis (Demirguc-Kunt and Detragiache, 2002;Beck et al, 2006a) and banks' risk taking behaviour (Gonzalez, 2005;Laeven and Levine, 2006).…”

The Value of a Joint Liability Scheme: Estimating Group Support for German Landesbanken

“…In the case of banks, balance sheet data as well as income statement data serve as the main determinants of their rating. This relationship is confirmed in many studies and extended along several dimensions, for instance with country indicators (Caporale et al 2012), regulatory and supervisory indicators (Pasiouras et al 2006), or the banks' solicitation status (Poon and Firth 2005).…”