Rating Assignments: Lessons from International Banks

This paper estimates ordered logit and probit regression models for bank ratings which also include a country index to capture country-specific variation. The empirical findings provide support to the hypothesis that the individual international bank ratings assigned by Fitch Ratings are underpinned by fundamental quantitative financial analyses. Also, there is strong evidence of a country effect. Our model is shown to provide accurate predictions of bank ratings for the period prior to the 2007 - 2008 banking crisis based upon publicly available information. However, our results also suggest that quantitative models are not likely to be able to predict ratings with complete accuracy. Furthermore, we find that both quantitative models and rating agencies are likely to produce highly inaccurate predictions of ratings during periods of financial instability.International banks, ratings, ordered choice models, country index

EU Banks Rating Assignments: Is there Heterogeneity between New and Old Member Countries?

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.EU countries, banks, ratings, ordered probit models, index of indicator variable

EU Banks Rating Assignments: Is there Heterogeneity between New and Old Member Countries?

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.EU countries, banks, ratings, ordered probit models, index of indicator variables

Is there a lead-lag relationship for country ratings?

We assess herding by considering the lead-lag relationship of sovereign ratings assigned by the 3 main rating agencies at the individual country level. The only previous study of such a lead-lag relationship (Alsakka and ap Gwilym, 2010) used pooled data methods that assume this lead-lag relationship is homogeneous across countries. Given that different rating agencies may have different levels of expertise (reputation) for different countries it is not obvious that such homogeneity holds. We therefore conduct poolability tests within this context to assess this assumption and find evidence of heterogeneity. This leads us to conduct country-by-country time-series tests to assess the lead-lag relationship among agencies. To our knowledge we are the first to do this and thereby extend the literature on herding among rating agencies' sovereign assignments. We also consider changes in the lead-lag relationship through time by splitting the sample into pre-crisis and crisis periods to assess the extent to which any herding is intentional and our results indicate some degree of heterogeneity through time. To the extent that there is herding we find that it is generally towards Standard and Poor’s ratings confirming our expectations given that this agency is regarded as possessing the greatest reputational capital. However, our results do not support the expectation that Fitch is a follower for more (a leader for less) countries than Moody’s

Rating Assignments: Lessons from International Banks

This paper estimates ordered logit and probit regression models for bank ratings which also include a country index to capture country-specific variation. The empirical findings provide support to the hypothesis that the individual international bank ratings assigned by Fitch Ratings are underpinned by fundamental quantitative financial analyses. Also, there is strong evidence of a country effect. Our model is shown to provide accurate predictions of bank ratings for the period prior to the 2007 – 2008 banking crisis based upon publicly available information. However, our results also suggest that quantitative models are not likely to be able to predict ratings with complete accuracy. Furthermore, we find that both quantitative models and rating agencies are likely to produce highly inaccurate predictions of ratings during periods of financial instability.international banks, ratings, ordered choice models, country index

CEO compensation and bank efficiency: An application of conditional nonparametric frontiers

The paper investigates in a dynamic context the effect of Chief Executive Officer (CEO) bonus and salary payments on banks’ technical efficiency levels. Our methodological framework incorporates the latest developments on the probabilistic approach of efficiency measurement as introduced by B?din et al. (2012). We apply time-dependent conditional efficiency estimates to analyse a sample of 37 US banks for the period from 2003 to 2012. The empirical evidence reveals a non-linear relationship between CEO bonus and salary payments and banks’ efficiency levels. More specifically it is reported that salary and bonus payments affect differently banks’ technological change and technological catch-up levels. Finally, the empirical evidence suggests that higher salary and bonus payments are not always aligned with higher technical efficiency levels

Productivity Growth in Network Models:An Application to Banking During the Financial Crisis

We construct Malmquist Productivity indices for two-stage processes. A two-stage data envelopment analysis model with an additive efficiency decomposition is used for the modeling of the two-stage process. We incorporate prior information into the analysis using the Weight Assurance Region model. This model offers advantages such as the weights representing the contribution of each stage to the overall process are always positive and we also can restrict them into a region given the available prior information. We extend this model from efficiency analysis to productivity analysis and we calculate Malmquist Productivity indices using four alternative decomposition approaches. The model is applied to a panel of banks in Central and Eastern European countries and productivity change is evaluated for three periods of the financial crisis. The alternative decompositions allow us to examine the various sources of productivity change during the financial crisis. Convergence patterns are also examined

Risk management of the Vietnamese banking system: A market research survey

The purpose of this paper is to examine risk management of the Vietnamese banking system. This is the first such study of the Vietnamese banking system. To be able to carry out a comparative analysis and provide policy recommendations for risk management, we carry out an original survey of Vietnamese commercial banks using a questionnaire. 42% of the interviewees are General/Deputy General Directors and 58% are Heads/Deputies of a risk management department. The Kruskal-Wallis, Pearson chi-square and other tests are employed to examine the relationship between risk management and bank efficiency. The survey results indicate that there is a difference between banks in terms of risk area identification, risk intensification methods prioritised, risk monitoring methods, efficiency improvement suggestions, awareness of other banks’ risk management systems and credit risk analysis

Performance of the banking sector of a developing country: a non-structural model using the disequilibrium approach

Based on the non-structural model – disequilibrium approach (Goddard and Wilson, 2009), this paper presents an empirical assessment of the degree of competition within the Vietnamese banking system from 1999 to 2009. We examine a greater number of environmental covariates and different dependent variables compared to previous applications of this model. Moreover, we use lagged input prices (to avoid endogeneity) and exclude assets (to avoid specification bias) in our models. The results indicate that the Vietnamese banking system operates in a monopolistic environment

Financial development and productive inefficiency: A robust conditional directional distance function approach

This paper examines whether the level of financial development helps lower countries’ inefficiency using time-dependent robust conditional directional distance functions in a sample of 91 countries over 1970–2011. The overall results reveal that the effect of financial development on countries’ productive inefficiency is highly nonlinear, and depends on countries’ income levels, suggesting that higher levels of financial development are enhancing more countries’ catching-up ability rather than their technological change