Market discipline through credit ratings and too-big-to-fail in banking

Sascha Kolaric, Florian Kiesel, Steven Ongena*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review


Do credit ratings help enforce market discipline on banks? Analyzing a uniquely comprehensive data set consisting of 1,081 rating change announcements for 154 international financial institutions between January 2004 and December 2015, we find that rating downgrades for internal reasons, such as adverse changes in the operating performance or capital structure of banks, are associated with a significant credit default swap spread widening. However, this widening only occurs for banks that are not perceived as to be Too-Big-to-Fail (TBTF). Our findings question the reliability of credit ratings as a tool to discipline TBTF banks and suggest that regulatory monitoring should remain the main mechanism for disciplining these banks.
Original languageEnglish
Pages (from-to)367-400
JournalJournal of Money, Credit and Banking
Issue number2-3
Early online date3 Feb 2021
Publication statusPublished - Mar 2021


  • credit ratings
  • CDS
  • too big to fail (TBTF)


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