Banks’ Ratings, the Financial Crisis and Size of Entities

The ratings described by the Bank of England’s Financial Stability Paper (2011) are an ordinal ranking of a borrower’s, or a security’s, credit quality, evaluated by a rating agency on the basis of a fundamental analysis of the financial and legal information by the issuer of a security. Therefore they have an important role in financial markets, because they reduce the problems of asymmetric information between issuers and investors, and the regulation of the former. In recent years this indicator has experienced a significant growth due to different reasons, such as the globalization of financial markets, the changes in the channels of financing (the development of markets vs banks), the emergence of new financial products and the role conceded by financial regulators. This last reason, the legal role, has considerable weight, as pointed out in the report of the International Monetary Fund (2010). In this way and related to the banking sector, Basel II allows the banks to calculate the minimum regulatory capital for banks based on the rating assigned by an established and reputable rating agency.