Guglielmo Maria Caporale , Roman Matousek and Chris Stewart EU Banks Rating Assignments : Is There Heterogeneity Between New And Old Member Countries ? October 2009

We model EU countries’ bank ratings using financial variables and allowing for intercept and slope heterogeneity. We find that country-specific factors (in the form of heterogeneous intercepts) are a crucial determinant of ratings. Whilst “new” EU countries typically have lower ratings than “old” EU countries, after controlling for financial variables, all countries are found to have significantly different intercepts, which confirms our hypothesis. This intercept heterogeneity may reflect differences in country risk and the legal and regulatory framework that banks face (such as foreclosure laws). In addition, ratings may respond differently to the liquidity and operating expenses to operating income variables across countries: typically ratings are more responsive to the former and less sensitive to the latter for “new” EU countries compared with “old” EU countries.