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


  • Spyros Pagratis

    (Athens University of Economics and Business)

  • Marco Stringa

    (Bank of England)


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.

Suggested Citation

  • Spyros Pagratis & Marco Stringa, 2009. "Modeling Bank Senior Unsecured Ratings: A Reasoned Structured Approach to Bank Credit Assessment," International Journal of Central Banking, International Journal of Central Banking, vol. 5(2), pages 1-39, June.
  • Handle: RePEc:ijc:ijcjou:y:2009:q:2:a:1

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    References listed on IDEAS

    1. Marshall E. Blume & Felix Lim & A. Craig MacKinlay, "undated". "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. 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.
    3. 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.
    4. 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, August.
    5. Amato, Jeffery D. & Furfine, Craig H., 2004. "Are credit ratings procyclical?," Journal of Banking & Finance, Elsevier, vol. 28(11), pages 2641-2677, November.
    6. Giovanni Dell’Ariccia & Deniz Igan & Luc Laeven, 2012. "Credit Booms and Lending Standards: Evidence from the Subprime Mortgage Market," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44, pages 367-384, March.
    7. Marshall E. Blume & Felix Lim & A. Craig MacKinlay, "undated". "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.
    8. 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.
    9. Davidson, Russell & MacKinnon, James G., 1993. "Estimation and Inference in Econometrics," OUP Catalogue, Oxford University Press, number 9780195060119.
    10. Albertazzi, Ugo & Gambacorta, Leonardo, 2009. "Bank profitability and the business cycle," Journal of Financial Stability, Elsevier, vol. 5(4), pages 393-409, December.
    11. repec:fth:pennfi:67 is not listed on IDEAS
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    Cited by:

    1. Alexander Karminsky & Richard Hainsworth & Vasily Solodkov, 2013. "Arm’s Length Method for Comparing Rating Scales," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 3(2), pages 114-135, December.
    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. 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.
    4. Sujit Kapadia & Matthias Drehmann & John Elliott & Gabriel Sterne, 2012. "Liquidity Risk, Cash Flow Constraints, and Systemic Feedbacks," NBER Chapters,in: Quantifying Systemic Risk, pages 29-61 National Bureau of Economic Research, Inc.
    5. repec:eee:quaeco:v:66:y:2017:i:c:p:302-313 is not listed on IDEAS
    6. Volkova, Olga & Lvova, Irina, 2016. "Effect of financial indicators on international ratings of russian banks," Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 1, pages 177-195, February.
    7. Sotirios Kokas & Dmitri Vinogradov & Marios Zachariadis, 2018. "Which Banks Smooth and at What Price?," University of Cyprus Working Papers in Economics 01-2018, University of Cyprus Department of Economics.
    8. Mizen, Paul & Tsoukas, Serafeim, 2012. "Forecasting US bond default ratings allowing for previous and initial state dependence in an ordered probit model," International Journal of Forecasting, Elsevier, vol. 28(1), pages 273-287.
    9. repec:kap:rqfnac:v:49:y:2017:i:4:d:10.1007_s11156-016-0613-x is not listed on IDEAS
    10. Jean-Loup SOULA, 2015. "Measuring heterogeneity in bank liquidity risk: who are the winners and the losers?," Working Papers of LaRGE Research Center 2015-09, Laboratoire de Recherche en Gestion et Economie (LaRGE), Université de Strasbourg.
    11. Lu, Meng-Jou & Chen, Cathy Yi-Hsuan & Härdle, Karl Wolfgang & Härdle, 2015. "Copula-Based Factor Model for Credit Risk Analysis," SFB 649 Discussion Papers SFB649DP2015-042, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    12. Papanikolaou, Nikolaos I. & Wolff, Christian C, 2015. "Does the CAMEL bank ratings system follow a procyclical pattern?," CEPR Discussion Papers 10965, C.E.P.R. Discussion Papers.

    More about this item

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions; Probabilities


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