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Modeling Bank Senior Unsecured Ratings: A Reasoned Structured Approach to Bank Credit Assessment

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  • Spyros Pagratis

    (Athens University of Economics and Business)

  • Marco Stringa

    (Bank of England)

Abstract

This paper studies the impact of bank-specific financial indicators and macroeconomic variables on bank senior unsecured ratings by Moody’s. Controlling for bank financial characteristics, we find significant evidence of procyclicality in bank ratings stemming from lagged interaction effects between the real output gap and the credit gap. In particular, macroeconomic slowdowns that follow credit booms tend to imply lower ratings. Similarly, when credit expansion above a trend is followed by strong economic performance, bank ratings tend to increase. Bank ratings also appear to correlate positively with the slope of the yield curve and tend to increase with sovereign ratings, market share of lending, and bank size. Given the ongoing debate on the importance, timeliness, and information content of credit ratings in general - and those assigned to banks in particular - the paper addresses a topic that is of great importance to central banks, regulators, and risk managers.

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Bibliographic Info

Article provided by International Journal of Central Banking in its journal International Journal of Central Banking.

Volume (Year): 5 (2009)
Issue (Month): 2 (June)
Pages: 1-39

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Handle: RePEc:ijc:ijcjou:y:2009:q:2:a:1

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  1. Marshall E. Blume & Felix Lim & A. Craig MacKinlay, . "The Declining Credit Quality of US Corporate Debt: Myth or Reality?," Rodney L. White Center for Financial Research Working Papers 3-98, Wharton School Rodney L. White Center for Financial Research.
  2. Ugo Albertazzi & Leonardo Gambacorta, 2006. "Bank profitability and the business cycle," Temi di discussione (Economic working papers) 601, Bank of Italy, Economic Research and International Relations Area.
  3. Dell’Ariccia, G. & Igan, D. & Laeven, L., 2009. "Credit Booms and Lending Standards: Evidence from the Subprime Mortgage Market," Discussion Paper 2009-46 S, Tilburg University, Center for Economic Research.
  4. Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon, 1999. "The financial accelerator in a quantitative business cycle framework," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pages 1341-1393 Elsevier.
  5. Giovanni Dell'Ariccia & Luc Laeven & Deniz Igan, 2008. "Credit Booms and Lending Standards," IMF Working Papers 08/106, International Monetary Fund.
  6. Marshall E. Blume & Felix Lim & A. Craig MacKinlay, . "The Declining Credit Quality of US Corporate Debt: Myth or Reality?," Rodney L. White Center for Financial Research Working Papers 03-98, Wharton School Rodney L. White Center for Financial Research.
  7. Amato, Jeffery D. & Furfine, Craig H., 2004. "Are credit ratings procyclical?," Journal of Banking & Finance, Elsevier, vol. 28(11), pages 2641-2677, November.
  8. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
  9. Marshall E. Blume & Felix Lim & A. Craig Mackinlay, 1998. "The Declining Credit Quality of U.S. Corporate Debt: Myth or Reality?," Journal of Finance, American Finance Association, vol. 53(4), pages 1389-1413, 08.
  10. Mathias Drehmann & Steffen Sorensen & Marco Stringa, 2008. "The integrated impact of credit and interest rate risk on banks: an economic value and capital adequacy perspective," Bank of England working papers 339, Bank of England.
  11. Davidson, Russell & MacKinnon, James G., 1993. "Estimation and Inference in Econometrics," OUP Catalogue, Oxford University Press, number 9780195060119, September.
  12. repec:fth:pennfi:67 is not listed on IDEAS
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Cited by:
  1. David Aikman & Piergiorgio Alessandri & Bruno Eklund & Prasanna Gai & Sujit Kapadia, & Elizabeth Martin, & Nada Mora & Gabriel Sterne & Matthew Willison, 2011. "Funding Liquidity Risk in a Quantitative Model of Systemic Stability," Central Banking, Analysis, and Economic Policies Book Series, in: Rodrigo Alfaro (ed.), Financial Stability, Monetary Policy, and Central Banking, edition 1, volume 15, chapter 12, pages 371-410 Central Bank of Chile.
  2. Aivazian, Sergey & Golovan, Sergey & Karminsky, Alexander & Peresetsky, Anatoly, 2011. "An approach to ratings mapping," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 23(3), pages 13-40.
  3. Sujit Kapadia & Matthias Drehmann & John Elliott & Gabriel Sterne, 2012. "Liquidity Risk, Cash Flow Constraints, and Systemic Feedbacks," NBER Chapters, in: Quantifying Systemic Risk, pages 28-61 National Bureau of Economic Research, Inc.

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