Location of banks and their credit ratings

Abstract

Purpose – This paper aims to examine whether credit ratings of banks are related to their location, i.e. inside or outside the Euro Area. Design/methodology/approach – The authors estimate a multilevel ordered probit model for banks’ credit ratings in 2011 and control for bank-specific factors. They use the overall ratings and the external support ratings provided by Fitch as the dependent variable. Findings – Banks located in Euro Area member countries, on average, receive a higher credit rating from Fitch than banks located outside the Euro Area. Evidence for a “too-big-to-fail” and a “too-big-to-rescue” effect was also found. Research limitations/implications – The monetary union effect on banks’ credit ratings may be affected by the period under investigation. The ratings refer to August 2011, when the European sovereign debt crisis was at its height. This implies that, if anything, the Economic and Monetary Union (EMU) effect is underestimated. Practical implications – Large banks in the Euro Area receive higher credit ratings, so they have a competitive advantage over small banks located outside the Euro Area. Social implications – The present evidence suggests that small European countries with an extensive banking sector will be better off if they are member of the European EMU. Originality/value – The relationship between location of banks and their credit ratings has hardly been researched before. The present evidence is directly related to a debate in the literature on this issue.