Big banks are awarded higher grades from ratings firms becausethe lenders provide them with business including evaluatingsecuritized debt, according to a European Central Bank study.

Larger financial institutions were more likely to receive bettergrades, according to the research report, which reviewed about39,000 quarterly bank ratings from Standard & Poor's, Moody'sInvestors Service and Fitch Ratings from 1990 to 2011.

Inflated grades on bonds backed by subprime mortgages during thehousing boom helped ignite the worst financial crisis since theGreat Depression when their values plummeted five years ago.Analysts at the three firms were pressured to give their stamp ofapproval to complex investments to win lucrative business from WallStreet banks, the Senate Permanent Subcommittee on Investigationssaid last year in a report.

The “bias mostly reflects credit rating agencies' conflictingincentives with respect to large banks,” authors Harald Hau, SamLangfield and David Marques-Ibanez wrote in the report posted onthe European Central Bank's website, whose findings don't representthat of the ECB.

“We strongly disagree with the methodology and conclusions ofthe study,” Michael Adler, a spokesman for Moody's, said in atelephone interview, declining to give more details.

“To suggest that large bank ratings are conflicted simplybecause those banks might also be in a 'stronger client position'is in our view a cynical leap — or what the ECB report calls a'hypothesis',” Dan Noonan, a spokesman for Fitch, wrote in ane-mail. “No business model is completely free from potentialconflicts of interest — what matters is how well they are managedand communicated to the market.”

Ed Sweeney, a spokesman for S&P, declined to comment.

Big banks systematically obtain more favorable credit ratingsthan smaller institutions because of their size and economic power,according to the study. At the extreme, large banks might become'too big to downgrade' for a rating company.

“A bank's power in relation to a rating agency is related to itssize,” the authors wrote. “Larger banks are more likely to havemultiple and more comprehensive business relations with ratingagencies.”

Banks may also enjoy higher ratings because many are consideredto have “implicit” government support.

In 2007, S&P's structured finance group took in $561 millionin revenue, sometimes charging banks more than $1 million to rate asingle offering, according to the Senate panel. About 90 percent ofAAA securities backed by subprime mortgages from 2006 and 2007 werelater cut to junk, or below Baa3 by Moody's and lower than BBB- atS&P.

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