#09-08
Do Supervisory Rating Standards Change Over Time
John Krainer and Jose A. Lopez
Abstract: Supervisory BOPEC ratings were assigned to bank holding companies (BHCs) during the years
1987 to 2004 as a summary of their overall performance and level of supervisory concern. In this
paper, we examine the stability of the BOPEC ratings assigned over that period. We model
supervisory ratings using balance sheet variables, and our analysis suggests that BOPEC rating
standards varied over time. Supervisors seem to have applied more stringent rating standards
from 1989 to 1992, a period marked by a recession and a large degree of distress in the banking
sector. Rating standards then eased during the economic recovery from 1993 to 1998, before
showing increasing signs of toughness again from 1999 through 2004. Based on our estimated
model parameters, we find that, in some cases, up to 25 percent of the BHCs that were assigned a
BOPEC rating in a “tough” year would have been given a better rating in an “easy” year. The
reasons for the observed variation in supervisory standards could be changes in supervisory
behavior, but they are also surely related to the substantial changes that occurred within the U.S.
banking system over this 17-year period.
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