The Federal Reserve Bank of New York works to promote sound and well-functioning financial systems and markets through its provision of industry and payment services, advancement of infrastructure reform in key markets and training and educational support to international institutions.
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Multiple Ratings and Credit Standards: Differences of Opinion inÂ the Credit Rating Industry
April 1996Number 12
JEL classification: G11, G12, G23
Authors: Richard Cantor and Frank Packer
Rating-dependent financial regulators assume that the same letter ratings from different agencies imply the same levels of default risk. Most 'third' agencies, however, assign significantly higher ratings on average than Moody's and Standard & Poor's. We show that, contrary to the claims of some rating industry professionals, sample selection bias can account for at most half of the observed average difference in ratings. We also investigate the economic rationale for using multiple rating agencies. Among the many variables considered, only size and bond-issuance history are consistently related to the probability of an issuer seeking third ratings. The probability ties to improve their standing under rating-dependent regulations.