Credit ratings as indicators of implicit government support for global systemically important banks

Abstract

This paper examines the assertion that ratings from the ratings agencies that explicitly assume governmental support for global systemically important banks (G-SIBs) translate into lower spreads and a funding cost advantage for those G-SIBs. By comparing market implied ratings to issuer ratings, the paper analyses whether the market over the past 14 years in fact has priced US bank holding company bonds, credit default swaps and equity based on issuer ratings that assume such support. It was observed for G-SIBs that market implied ratings are two to three notches more conservative than issuer ratings. In comparison, it was found that for non-G-SIBs that the market implied ratings are closer to the issuer ratings. Noted also was that the market implied ratings for G-SIBs track the standalone, unsupported ratings more closely than they do the ratings that have built-in implicit government support and thus it is concluded that market data discounts the notion of government support for G-SIBs.