‘Unsolicited sovereign ratings and the sovereign-bank ceiling: An unintended consequence of regulatory disclosure’

We can look forward to another debut performance at the CCP Seminar Series on Friday 29th January 2016, as the magnificent Patrycja Klusak (CCP & NBS) takes the stage to present ‘Unsolicited sovereign ratings and the sovereign-bank ceiling: An unintended consequence of regulatory disclosure‘ (joint work with Rasha Alsakka and Owain ap Gwilym at Bangor University). Patrycja recently joined the Norwich Business School as a Lecturer in Banking and Finance and became a CCP Faculty Member in January 2016. Her numerous research interests include: analysing the regulatory changes to the Credit Rating Agency (CRA) industry, empirical banking and applied econometrics. An abstract for Patrycia’s paper can be found below.

Abstract

This paper integrates three themes on regulation, unsolicited credit ratings, and the sovereign-bank rating ceiling. We reveal an unintended consequence of the EU rating agency disclosure rules upon rating changes, using data for S&P-rated banks in 44 countries between 2006 and 2013. The disclosure of sovereign solicitation status for 13 countries in February 2011 has an adverse effect on the ratings of intermediaries operating in these countries. The unsolicited sovereign rating status transmits risk to banks via the rating channel. The results suggest that banks bear a penalty for the solicitation status of their host sovereign’s ratings, thus revealing an unintended and adverse impact of EU regulation.

The seminar takes place from 13:00-14:00 in QUEENS 1.04. Tea will be provided directly afterwards on Floor 0 in the Elizabeth Fry Building.

‘Extreme risk judgements and bank efficiency during the financial crisis: Implications for banking regulation’

The CCP seminar series returns for the Spring semester on Friday 10th January with a new programme of interdisciplinary presentations on competition and consumer policy. We kick-off this week with our Senior Research Associate Minyan Zhu (CCP) presenting her research on ‘Extreme risk judgements and bank efficiency during the financial crisis: Implications for banking regulation‘, which she has undertaken alongside Mette Asmild (University of Copenhagen). An abstract for her seminar can be found below.

Abstract

The recent financial crisis highlighted how banks are exposed to risks arising specifically from their mixes of assets and sources of funding. In traditional assessments of bank efficiency, using Data Envelopment Analysis (DEA), banks are not only allowed to, but in effect also rewarded for, using extreme risk adjusted weights for the different input- and output factors. In this paper we propose a method of measuring bank efficiency, based on weight restricted DEA that limits the banks’ abilities to use extreme risk judgements.

Without a priori knowledge of ‘true’ risk levels, nor of a set of model banks whose weights can be imposed on all banks, we propose to use a range of allowable weights determined from the average weights across the efficient banks, in order to balance extreme judgements. Based on a data set comprising the largest European banks during the financial crisis, we illustrate the impact of the proposed weight restrictions in two different efficiency models; one related to the banks’ funding mix and one related to their asset mix. The results show that banks which were bailed out by their respective governments during the crisis are over-represented among those banks that are heavily affected by imposing these weight restrictions. This means that using a more balanced set of weights tend to reduce the estimated efficiency scores more for those banks that exhibited risky behaviour during the crisis, which confirms the potential bias within standard DEA which does not control for extreme weights applied by highly risky banks.

We also discuss the use of the proposed method as a regulatory tool to constrain discretion in complying with regulatory capital benchmarks such as the Basel regulatory capital ratios. Specifically the use of weight restrictions enables us to select a set of model banks and we suggest that these model banks’ internal estimates can be used as references to constrain the discretion in the choice of risk estimates (for instance, probability of default per rating grade) which are used to derive regulatory capital ratios. This will then reduce discretion in the derived capital ratios thus improving the effectiveness of the regulatory capital benchmarks.

The seminar will takes place from 13:00-14:00 in the Thomas Paine Study Centre, Room 1.4.

Do Depositors Benefit from Bank Mergers?

We were pleased to hear from former CCP Member John Ashton recently. He has been awarded a prize for his paper “Do Depositors Benefit from Bank Mergers? An Examination of the UK Deposit Market” which was based on a CCP working paper.

 

John Ashton award announcement

Congratulations to John! You can find his paper on the journal website.