Essays on the economics of credit rating agencies and banking [Elektronische Ressource] / vorgelegt von Josef Forster

Josef Forster

Informations

• Publié par: ludwig-maximilians-universitat_munchen
• Publié le: 01 janvier 2008
• Nombre de lectures: 9
• Langue: English

Extrait

Essays on the Economics of Credit
Rating Agencies and Banking
Inaugural-Dissertation
zur Erlangung des Grades
Doctor oeconomiae publicae (Dr. oec. publ.)
an der Ludwig-Maximilians-Universit?t M?nchen
2008
vorgelegt von
Josef Forster
Referent: Prof. Dr. Gerhard Illing
Korreferent: Prof. Dr. Monika Schnitzer
Promotionsabschlussberatung: 16. Juli 2008Acknowledgements
First and foremost I thank Professor Gerhard Illing for the supervision of my
doctoral thesis. I thank him for giving me guidance, comments and encouragement
duringmyPh.D.studiesandforhisopennesstomyideaswhichallowedmetofollow
my interests without any restrictions. Working at his chair was a pleasure due to
an excellent work atmosphere and a low non-scienti?c work load.
Furthermore I thank Professor Monika Schnitzer who kindly agreed to serve as
second supervisor and Professor Andreas Hau?er who completes my thesis commit-
tee as third examiner.
Special thanks go to my former and current colleagues at the Seminar f?r Mak-
ro?konomie. I am indebted to Desislava Andreeva, Julia Bersch, Moritz Hahn,
FrankHeinemann, FlorianKajuth, Uli Kl?h, StephanSauer, andSebastianWatzka
for giving many valuable comments at our internal seminars and for creating a very
pleasant and supportive atmosphere. Special thanks also go to Katri Mikkonen, my
co-author of the third paper of this dissertation. I would also like to thank AgnØs
Bierprigl for her outstanding administrative support and Dirk R?sing who kept the
IT-systemrunningatourfacultyandforhishelpinghandwithallkindsofcomputer
problems.
I am also very grateful to my parents and siblings for their support during all
these years. Finally, I thank Julia Scherb for bearing my moods, her love, her
patience, and ongoing support. I dedicate this thesis to her.
Josef ForsterCONTENTS
Contents
List of Figures iv
List of Tables iv
I General Introduction 1
1 Economics of Credit Rating Agencies 1
1.1 The Role of CRAs in Financial Markets . . . . . . . . . . . . . . . . 1
1.2 Literature and Motivation . . . . . . . . . . . . . . . . . . . . . . . . 7
1.3 The Optimal Regulation of Credit Rating Agencies . . . . . . . . . . 10
1.4 Credit Rating Agencies and Financial Market Stability . . . . . . . . 12
2 Economics of Banking 13
2.1 The Capital Decision of Banks . . . . . . . . . . . . . . . . . . . . . . 13
2.2 Costly Bank Capital - Demand and Supply Side Considerations . . . 15
II Credit Rating Agencies 17
3 The Optimal Regulation of CRAs 17
3.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
3.2 Related Literature . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
3.3 The Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
iCONTENTS
3.3.1 Investment Bank, Investors, and the Credit Rating Agency . . 23
3.3.2 Observable and Unobservable Rating Quality . . . . . . . . . 29
3.3.3 The Optimal Rating Standard . . . . . . . . . . . . . . . . . . 33
3.4 Con?icts of Interest and Optimal Regulation . . . . . . . . . . . . . 40
3.4.1 Optimal Rating Standard and Con?icts of Interest. . . . . . . 42
3.4.2 Regulatory Intervention and Social Value . . . . . . . . . . . . 47
3.5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Appendix 3.A Proofs of Propositions . . . . . . . . . . . . . . . . . . . . . 54
Appendix 3.B Derivation of Equation (15) . . . . . . . . . . . . . . . . . 57
4 CRAs and Financial Market Stability 58
4.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
4.2 Related Literature . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
4.3 The Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
4.3.1 Framework and Assumptions . . . . . . . . . . . . . . . . . . 63
4.3.2 Credit Ratings and Multiple Equilibria . . . . . . . . . . . . . 68
4.3.3 Rating Fee and Financial Market Stability . . . . . . . . . . . 70
4.3.4 Mandatory versus Voluntary Credit Ratings . . . . . . . . . . 78
4.3.5 Robustness: Institutional Investors pay Rating Fee . . . . . . 81
4.4 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
Appendix 4.A Proofs of Propositions . . . . . . . . . . . . . . . . . . . . . 88
iiCONTENTS
5 Concluding Remarks to Chapters 3 and 4 93
III Economics of Banking 96
6 Costly Bank Capital - Demand and Supply 96
6.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
6.2 Related Literature . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
6.3 Capital Costs, Demand, and Supply . . . . . . . . . . . . . . . . . . . 100
6.4 CEB Banking Sector and the Dataset . . . . . . . . . . . . . . . . . . 102
6.5 Descriptive Statistics . . . . . . . . . . . . . . . . . . . . . . . . . . . 105
6.6 Model Speci?cation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109
6.7 Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112
6.8 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117
Appendix 6.A Comparison of EAR Means and Distributions . . . . . . . 119
References 120
iiiLIST OF FIGURES
List of Figures
3.1 Interactions between CRA, IB, and investors. . . . . . . . . . . . . . 29
3.2 Sequence of events (chapter 3) . . . . . . . . . . . . . . . . . . . . . . 35
4.1 Sequence of events (chapter 4) . . . . . . . . . . . . . . . . . . . . . . 67
IB4.2 Increase of the rating fee . . . . . . . . . . . . . . . . . . . . . . . 77
6.1 Ratio of foreign owned bank assets to total bank assets. . . . . . . . . 104
6.2 Distribution of capital ratios (EAR). . . . . . . . . . . . . . . . . . . 106
List of Tables
1.1 Rating categories and de?nitions. . . . . . . . . . . . . . . . . . . . . 3
6.1 Summary statistics EAR groups. . . . . . . . . . . . . . . . . . . . . 107
6.2 Summary statistics GDPc, SMG. . . . . . . . . . . . . . . . . . . . . 108
6.3 Explanatory variables. . . . . . . . . . . . . . . . . . . . . . . . . . . 110
6.4 Results panel regression. . . . . . . . . . . . . . . . . . . . . . . . . . 113
6.5 Robutstness check of supply side in?uence. . . . . . . . . . . . . . . . 115
6.6 Regressions without banks with Austrian parent banks. . . . . . . . . 117
6.7 Two-sample t-test . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119
6.8 Two-sample Kolmogorov - Smirnov test . . . . . . . . . . . . . . . . . 119
ivPart I
General Introduction
This dissertation consists of three self-contained research papers and addresses two
relevant topics from the ?eld of the economics of ?nancial institutions and services.
The ?rst topic (part II) studies issues on the economics of credit rating agencies
andconsistsoftwotheoreticalresearchpapers(chapters3and4). Thesecondtopic
(part III) contributes to the economics of banking and consists of one empirical
research paper (chapter 6). Chapter 1 and 2 of this general introduction provide
an overview of the motivation, the related literature, and the main results of those
three papers.
1 Economics of Credit Rating Agencies
1.1 The Role of Credit Rating Agencies in Financial Mar-
kets
Standard&Poor?s,oneoftheworld?sleadingcreditratingagencies(inthefollowing
CRA), de?nes a credit rating of a debt issue as "[...] a current opinion of the credit-
worthiness of an obligor with respect to a speci?c ?nancial obligation [...]. [...] The
opinion evaluates the obligor?s capacity and willingness to meet its ?nancial com-
1mitments [...]." The purpose of credit ratings is therefore to decrease informational
asymmetry between an issuer of a debt instrument and investors and to improve
1seethewebsiteofStandard&Poor?s: www.standardandpoors.com;otherCRAsuseverysimilar
de?nitions of a credit rating.
11. ECONOMICS OF CREDIT RATING AGENCIES
theallocationofcapital. Theratingprocessconsistsofqualitative,quantitativeand
legal analysis and CRAs express their credit ratings by discrete rating categories.
Cantor (2001) notes that credit ratings condense a big amount of information into
2one symbol, which is primarily determined by the expected loss of a debt instru-
ment. Crouhy et al. (2001) summarize that the qualitative analysis considers the
qualityofmanagement,theissuer?scompetitivenesswithinitsindustry,theexpected
growth of the industry, and its vulnerability to regulatory changes, labor relations,
and technological changes. The quantitative analysis is mainly concerned with the
?nancialanalysisoftheissuer. Standard&Poor?susesthelettercombinationsAAA
to BBB for investment-grade long term issues and BB to D for speculative-grade
long term issues. Another global CRA, Fitch Ratings, uses the same classi?cation
asStandard&Poor?s,whereasMoody?susesAaatoBaatoassigninvestment-grade
and Ba to C for speculative-grade. All three additionally distinguish between issue
and issuer credit ratings and long- and short-term issues. Table 1.1 provides an
overview of the di⁄erent rating categories of Standard & Poor?s and Moody?s and a
3short de?nition for each rating category. With increasing volume and complexity
of ?nancial markets - for example with the raise of structured?nance products such
as collateralized debt obligations - the reliance of both investors and regulators on
credit ratings has grown rapidly over the last years. The global