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BA-FI2: Financial Intermediation: Credit Ratings and Financial Stability
Mittwoch, 18.03.2020:
16:00 - 17:30

Chair der Sitzung: Matthias Horn, Otto-Friedrich-Universität Bamberg
Ort: Virtueller Raum 5

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Losing funds, or losing face? Reputational and Accountability Mechanisms in the Credit Rating Industry

Martin Angerer1, Matthias Herrmann-Meng1, Wiebke Szymczak2

1Universität Liechtenstein, Liechtenstein; 2Universität Hamburg, Deutschland

The three major credit rating agencies Standard & Poor’s, Moody’s and Fitch all rely on an issuer-pays remuneration model. As a consequence, they are criticized for having a conflict of interest and assigning inflated ratings. This paper uses an experimental approach to evaluate whether reputational concerns can effectively discipline credit rating agencies and reduce rating inflation in a competitive environment. Our standard treatment represents a duopolistic rating agency market structure without further manipulations, while our experimental treatment features a reputation-based feedback system that allows investors to evaluate published reports. Although our results suggest that rating inflation occurs less frequently in such an environment, it still persists at some level. In a second step, we analyze how explicit accountability mechanisms (i.e. expectation to justify one’s actions to others) enhance this disciplining effect. We find that accountability in conjunction with reputation mechanisms effectively extinguish rating inflation. Furthermore, we explain how this decrease in rating inflation affects the issuer’s and investors’ decision-making. Finally, we discuss our results in the context of past academic research findings and their implications for regulatory practices.

Can CoCo-bonds Mitigate Systemic Risk?

Matthias Petras, Arndt-Gerrit Kund

Universität zu Köln, Deutschland

Diskutant: Rainer Baule (Fernuniversität Hagen)

After the 2007 financial crises, the idea of contingent convertible (CoCo) capital was revived and manifold proposed as a means to stabilize individual banks, and hence the entire banking system. The purpose of this paper is to empirically test, whether CoCo-bonds indeed improve the stability of the banking system and reduce systemic risk. Using the broadly applied SRISK metric, we obtain contradicting results, based on the classification of the CoCo-bond as debt or equity. We remedy this short-coming by proposing an adjustment to the original SRISK formula that now correctly accounts for CoCo-bonds. Using empirical tests, we show that the undue disparity has been solved by our adjustment, and that CoCo-bonds reduce systemic risk.

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