Anticipating bank downgrading by credit-rating agencies: An exploratory study

Lin (Cynthia) Cai (2011). Anticipating bank downgrading by credit-rating agencies: An exploratory study Honours Thesis, UQ Business School, The University of Queensland.

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Author Lin (Cynthia) Cai
Thesis Title Anticipating bank downgrading by credit-rating agencies: An exploratory study
School, Centre or Institute UQ Business School
Institution The University of Queensland
Publication date 2011-10
Thesis type Honours Thesis
Supervisor Associate Professor Necmi K. Avkiran
Total pages 97
Language eng
Subjects 1502 Banking, Finance and Investment
Abstract/Summary Credit-rating agencies (CRAs), such as Standard and Poor’s or Moody’s, do not always provide timely advice on credit downgrades. CRAs have also been criticised for providing overly optimistic ratings for financial institutions during the 2007-2009 global financial crisis. Timely and accurate credit ratings are particularly significant when financial institutions are scrutinised because the latter occupy a central role in economic activity. This study aims to investigate the feasibility of using Data Envelopment Analysis (DEA), a non-parametric method, as a forward-looking alternative method to flag bank holding companies likely to become distressed in the near future. Two financial performance models, CAMELS and CPM are proposed to guide users in categorising financial variables instead of arbitrarily combining inputs and outputs in DEA modelling. The results obtained generally support DEA’s discriminatory and predictive power, suggesting that DEA can identify distressed banks up to 2 years in advance and can provide useful information on potential efficiency improvement opportunities for banks. Robustness tests reveal that DEA is sensitive to sample composition, sample size, and treatment of outliers.

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Created: Thu, 28 Jun 2012, 14:50:30 EST by Karen Morgan on behalf of UQ Business School