Is There Cyclical Bias in Bank Holding Company Risk Ratings?
Timothy J. Curry*
Gary S. Fissel*
Gerald A. Hanweck**
August, 2007
*Division of Insurance and Research, Federal Deposit Insurance Corporation (FDIC).
tcurry@fdic.gov; gfissel@fdic.gov .
**School of Management, George Mason University, Fairfax, VA. ghanweck@gmu.edu; and Visiting
Scholar, FDIC
The views expressed are those of the authors and do not necessarily reflect the views of the FDIC
or its staff. We thank especially Robert DeYoung for comments as well as participants at the
following meetings: the 2005 Southern Finance Association in Key West, FL; the 2006 FMA
European meetings in Stockholm, Sweden; the 2006 Western Economic Association International in
San Diego, CA; and the FDIC’s Division of Insurance and Research Seminar Series.
Timothy J. Curry*
Gary S. Fissel*
Gerald A. Hanweck**
August, 2007
*Division of Insurance and Research, Federal Deposit Insurance Corporation (FDIC).
tcurry@fdic.gov; gfissel@fdic.gov .
**School of Management, George Mason University, Fairfax, VA. ghanweck@gmu.edu; and Visiting
Scholar, FDIC
The views expressed are those of the authors and do not necessarily reflect the views of the FDIC
or its staff. We thank especially Robert DeYoung for comments as well as participants at the
following meetings: the 2005 Southern Finance Association in Key West, FL; the 2006 FMA
European meetings in Stockholm, Sweden; the 2006 Western Economic Association International in
San Diego, CA; and the FDIC’s Division of Insurance and Research Seminar Series.
Is There Cyclical Bias in Bank Holding Company Risk Ratings?
Abstract
This paper examines whether bank holding company (BHC) risk ratings are asymmetrically assigned
or biased over business cycles from 1986 to 2003. In a model of ratings determination which
accounts for bank characteristics, financial market conditions, past supervisory information, and
aggregate macro-economic factors, we find that bank exam ratings exhibit inter-temporal
characteristics. First, exam ratings exhibit some evidence of examiner bias for several periods
analyzed. When the business cycle turns, examiners sometime depart from standards that they set
during the previous phases of the business cycle. However, this bias is not widespread or
systematic. Second, exam ratings exhibit some inertia. Our results suggest that examiners rate on
the side of not changing (rather than upgrading or downgrading) an institution’s exam rating. Third,
we find strong and robust evidence of a secular trend towards more stringent examination BHC
ratings standards over time.
JEL Classification: G21
Keywords: Bank Holding Company risk ratings, Cyclical bias in bank ratings, Secular trend in bank
risk ratings
2
Abstract
This paper examines whether bank holding company (BHC) risk ratings are asymmetrically assigned
or biased over business cycles from 1986 to 2003. In a model of ratings determination which
accounts for bank characteristics, financial market conditions, past supervisory information, and
aggregate macro-economic factors, we find that bank exam ratings exhibit inter-temporal
characteristics. First, exam ratings exhibit some evidence of examiner bias for several periods
analyzed. When the business cycle turns, examiners sometime depart from standards that they set
during the previous phases of the business cycle. However, this bias is not widespread or
systematic. Second, exam ratings exhibit some inertia. Our results suggest that examiners rate on
the side of not changing (rather than upgrading or downgrading) an institution’s exam rating. Third,
we find strong and robust evidence of a secular trend towards more stringent examination BHC
ratings standards over time.
JEL Classification: G21
Keywords: Bank Holding Company risk ratings, Cyclical bias in bank ratings, Secular trend in bank
risk ratings
2