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

Author

Listed:
  • Pastor Monsálvez José Manuel

    (UNIVERSITY OF VALENCIA INSTITUTO VALENCIANO DE INVESTIGACIONES ECONÓMICAS (Ivie))

  • Fernández de Guevara Radoselovics Juan

    (University of Valencia; Ivie)

  • Salvador Muñoz Carlos

    (Universidad de Valencia)

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.

Suggested Citation

  • Pastor Monsálvez José Manuel & Fernández de Guevara Radoselovics Juan & Salvador Muñoz Carlos, 2012. "Impact of the Subprime Crisis on Bank Ratings: The Effect of the Hardening of Rating Policies and Worsening of Solvency," Working Papers 2012120, Fundacion BBVA / BBVA Foundation.
    • Handle: RePEc:fbb:wpaper:2012120
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    1. is not listed on IDEAS
    2. Charoontham, Kittiphod & Amornpetchkul, Thunyarat (Bam), 2018. "Performance-based payment scheme to hedge against credit rating inflation," Research in International Business and Finance, Elsevier, vol. 44(C), pages 471-479.
    3. Luitel, Prabesh & Vanpée, Rosanne & De Moor, Lieven, 2016. "Pernicious effects: How the credit rating agencies disadvantage emerging markets," Research in International Business and Finance, Elsevier, vol. 38(C), pages 286-298.
    4. Salvador, Carlos & Fernández de Guevara, Juan & Pastor, José Manuel, 2018. "The adjustment of bank ratings in the financial crisis: International evidence," The North American Journal of Economics and Finance, Elsevier, vol. 44(C), pages 289-313.
    5. Ballis, Antonis & Ioannidis, Christos & Sifodaskalakis, Emmanouil, 2024. "Structural shifts in bank credit ratings," Journal of Financial Stability, Elsevier, vol. 73(C).
    6. Valdir Domeneghetti & Fabiano Guasti Lima, 2019. "Strategic direction re-evaluation of bank ratings in Brazil," Economics Bulletin, AccessEcon, vol. 39(2), pages 1336-1347.
    7. Pompella, Maurizio & Dicanio, Antonio, 2017. "Ratings based Inference and Credit Risk: Detecting likely-to-fail Banks with the PC-Mahalanobis Method," Economic Modelling, Elsevier, vol. 67(C), pages 34-44.
    8. GABAN Lucian & RUS IonuÈ› - Marius & FETITA Alin, 2017. "A Model Of Rating Of Eastern European Banks," Revista Economica, Lucian Blaga University of Sibiu, Faculty of Economic Sciences, vol. 69(3), pages 42-56, August.
    9. Cuadros-Solas, Pedro J. & Salvador, Carlos & Suárez, Nuria, 2021. "Am I riskier if I rescue my banks? Beyond the effects of bailouts," Journal of Financial Stability, Elsevier, vol. 56(C).
    10. Drago, Danilo & Gallo, Raffaele, 2018. "Do multiple credit ratings affect syndicated loan spreads?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 56(C), pages 1-16.
    11. Ahmed A. Elamer & Collins G. Ntim & Hussein A. Abdou & Andrews Owusu & Mohamed Elmagrhi & Awad Elsayed Awad Ibrahim, 2021. "Are bank risk disclosures informative? Evidence from debt markets," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(1), pages 1270-1298, January.
    12. Cuadros-Solas, Pedro Jesús & Salvador Muñoz, Carlos, 2022. "Disentangling the sources of sovereign rating adjustments: An examination of changes in rating policies following the GFC," Research in International Business and Finance, Elsevier, vol. 59(C).
    13. Julio Cezar Soares Silva & Diogo Ferreira de Lima Silva & Luciano Ferreira & Adiel Teixeira de Almeida-Filho, 2022. "A dominance-based rough set approach applied to evaluate the credit risk of sovereign bonds," 4OR, Springer, vol. 20(1), pages 139-164, March.

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    Keywords

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    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
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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