Rating Banks : Risk and Uncertainty in an Opaque Industry
- Topics:
- Commercial Lending
- Tags:
- Asset,
- Bank,
- Financial,
- Financial Services
- Source:
- Federal Reserve Bank of New York
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Overview: The pattern of disagreement between bond raters suggests that bank and insurance firms are inherently more opaque than other firms. Moody’s and S&P split more frequently over these financial intermediaries and the splits are more lopsided, as theory here predicts. Uncertainty over the banks stems from their assets, loans and trading assets in particular, the risks of which are hard to observe or easy to change. Banks’ high leverage, which invites agency problems, compounds the uncertainty over their assets. The findings bear on both the existence and reform of bank regulation. Disagreement between raters also increases with maturity (given risk), but decreases with the size of the issue, presumably because the smaller issues are by smaller, more opaque firms. The relative opacity of banks provides some justification for government intervention in the banking market, since runs, contagion, and other strains of systemic risk stem ultimately from the opacity of banks’ assets. Saying that does not necessarily imply that the current regulatory structure is optimal, of course. The push for increased market discipline and disclosure may shed light. However, reformers should remember what they are dealing with. To use a popular metaphor: banks may be the black holes of the financial universe; hugely powerful and influential, but to some irreducible extent unfathomable.
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Format: PDF | Size: 129KB | Date: Apr 2000 | Pages: 37
