Impact of the subprime crisis on bank ratings: The effect of the hardening of rating policies and worsening of solvency

Carlos Salvador, José Pastor and Juan Fernández de Guevara
Authors registered in the RePEc Author Service: Juan Fernández-de-Guevara ()

Journal of Financial Stability, 2014, vol. 11, issue C, 13-31

Abstract: This 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 hypothesises the possibility that this worsening is due not exclusively to a deterioration in the banks’ credit quality, but also to a change in the behaviour 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 lowering of ratings (10.88%) is explained (75%) by the deterioration in the solvency of the banks, but also (25%) 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)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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Related works:
Working Paper: Impact of the Subprime Crisis on Bank Ratings: The Effect of the Hardening of Rating Policies and Worsening of Solvency (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finsta:v:11:y:2014:i:c:p:13-31

DOI: 10.1016/j.jfs.2013.10.005

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