Ratings, Rating Agencies and the Global Financial System

by Levich, Richard M.; Majnoni, Giovanni; Reinhart, Carmen M.

• ISBN13: 9781402070167
• ISBN10: 1402070160
• Format: Hardcover
• Copyright: 2002-08-01
• Publisher: Kluwer Academic Pub

Summary

The business of credit ratings began in the United States in the early 1900s. Over time, credit ratings have gradually taken on an expanding role, both in the United States and abroad and in official financial market regulation as well as in private capital market decisions. However, in 1999 the Bank for International Settlements (through its Committee on Banking Supervision) proposed rule changes that would provide an explicit role for credit ratings in determining a bank's required regulatory risk capital. Once implemented, this BIS proposal (often referred to as Basel 2) would vastly elevate the importance of credit ratings by linking the required measure of bank capital to the credit rating of the bank's obligors. With these regulatory changes under active discussion, research into the role for ratings and rating agencies in the global financial system is particularly apropos. Ratings, Rating Agencies and the Global Financial System brings together the research of economists at New York University and the University of Maryland, along with those from the private sector, government bodies, and other universities. The first section of the volume focuses on the historical origins of the credit rating business and its present day industrial organization structure. The second section presents several empirical studies crafted largely around individual firm-level or bank-level data. These studies examine (a) the relationship between ratings and the default and recovery experience of corporate borrowers, (b) the comparability of credit ratings made by domestic and foreign rating agencies, and (c) the usefulness of financial market indicators for rating banks, among other topics. In the third section, the record of sovereign credit ratings in predicting financial crises and the reaction of financial markets to changes in credit ratings is examined. The final section of the volume emphasizes policy issues now facing regulators and credit rating agencies.

Table of Contents

List of Contributors	vii
Preface	ix
Introduction: ``Ratings, Rating Agencies and the Global Financial System: Summary and Policy Implications,''	1	(16)
Richard M. Levich
Giovanni Majnoni
Carmen M. Reinhart
Part I. History, Value and Industrial Structure of Credit Rating and Reporting Agencies	17	(80)
A Historical Primer on the Business of Credit Rating	19	(22)
Richard Sylla
The Credit Rating Industry: An Industrial Organization Analysis	41	(24)
Lawrence J. White
The Paradox of Credit Ratings	65	(32)
Frank Partnoy
Discussants: Martin Fridson	85	(12)
Mark Flannery	89	(8)
Part II. Empirical Evidence on Credit Rating Agencies: Pricing and Regulatory Aspects	97	(128)
The Role of Credit Ratings in Bank Capital	99	(18)
Edward I. Altman
Anthony Saunders
A Guide to Choosing Absolute Bank Capital Requirements	117	(22)
Mark Carey
Credit Ratings and the Japanese Corporate Bond Market	139	(20)
Frank Packer
How Good is the Market at Assessing Bank Fragility? A Horse Race Between Different Indicators	159	(18)
Paola Bongini
Luc Laeven
Giovanni Majnoni
Rating Banks in Emerging Markets: What Credit Rating Agencies Should Learn from Financial Indicators	177	(48)
Liliana Rojas-Suarez
Discussants: Richard J. Herring	202	(23)
Larry D. Wall	213	(8)
Linda Allen	221	(4)
Part III. Empirical Evidence on Credit Ratings Agency's Performance: Macroeconomic Aspects	225	(62)
Rating Agencies and Financial Markets	227	(24)
Graciela Kaminsky
Sergio Schmukler
Sovereign Credit Ratings Before and After Financial Crises	251	(18)
Carmen M. Reinhart
Equity Risk Premiums	269	(18)
Aswath Damodaran
Part IV. Policy Issues Facing Regulators and Credit Rating Agencies	287	(82)
Rating Agencies: Is There an Agency Issue?	289	(30)
Roy C. Smith
Ingo Walter
Do Banks Provision for Bad Loans in Good Times? Empirical Evidence and Policy Implications	319	(24)
Michele Cavallo
Giovanni Majnoni
Policy Issues Facing Rating Agencies	343	(2)
Jerome S. Fons
Credit Risk and Financial Instability	345	(24)
Richard J. Herring
Author Index	369	(6)
Subject Index	375