Impact of the Subprime Crisis on Bank Ratings: The Effect of the Hardening of Rating Policies and Worsening of Solvency

José Pastor, Juan Fernández de Guevara Radoselovics () and Carlos Salvador Muñoz ()
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Juan Fernández de Guevara Radoselovics: University of Valencia; Ivie
Carlos Salvador Muñoz: Universidad de Valencia
Authors registered in the RePEc Author Service: Juan Fernández-de-Guevara ()

No 2012120, Working Papers from Fundacion BBVA / BBVA Foundation

Abstract: This working paper studies the impact of the subprime crisis on the ratings issued by the rating agencies in evaluating the solvency of banks. After ascertaining a significant worsening of ratings after the crisis, the paper hypothesizes the possibility that this worsening is not due exclusively to deterioration in the banks' credit quality, but also to a change in the behavior of the rating agencies. The study designs a methodology to separate the observed change in ratings into two multiplicative components: one associated with the deterioration of the banks' solvency itself and another associated with the change in the agencies' valuation criteria. The methodology is applied to the Spanish Banking System during the period 2000-2009. The results obtained show that the observed ratings cuts (13%) are explained (65%) by the deterioration in the solvency of the banks, but also (35%) by the hardening of the valuation criteria adopted by the agencies. This shows the procyclical character of ratings.

Keywords: Bank ratings; subprime crisis effect; financial and environmental risk factors; ordered probit models. (search for similar items in EconPapers)
JEL-codes: G21 G24 G32 (search for similar items in EconPapers)
Pages: 46
Date: 2012-09
New Economics Papers: this item is included in nep-ban and nep-rmg
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Journal Article: Impact of the subprime crisis on bank ratings: The effect of the hardening of rating policies and worsening of solvency (2014)
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