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Title:EU banks rating assignments: Is there heterogeneity between new and old member countries? PDF Logo
Authors:Caporale, Guglielmo Maria
Matousek, Roman
Stewart, Chris
Issue Date:2010
Series/Report no.:Discussion papers // German Institute for Economic Research 1009
Abstract:We model EU countries' bank ratings using financial variables and allowing for intercept and slope heterogeneity. Our aim is to assess whether old and new EU countries are rated differently and to determine whether new ones are assigned lower ratings, ceteris paribus, than old ones. We find that country-specific factors (in the form of heterogeneous intercepts) are a crucial determinant of ratings. Whilst new EU countries typically have lower ratings than old ones, after controlling for financial variables we also discover that all countries have significantly different intercepts, confirming our prior belief. This intercept heterogeneity suggests that each country's rating is assigned uniquely, after controlling for differences in financial factors, which may reflect differences in country risk and the legal and regulatory framework that banks face (such as foreclosure laws). In addition, we find that ratings may respond differently to the liquidity and operating expenses to operating income variables across countries. Typically ratings are more responsive to the former and less sensitive to the latter for new EU countries compared with old EU countries.
Subjects:EU countries
banks
ratings
ordered probit models
index of indicator variable
JEL:C25
C51
C52
G21
Document Type:Working Paper
Appears in Collections:Publikationen von Forscherinnen und Forschern des DIW
DIW-Diskussionspapiere

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