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

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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. repec:eee:riibaf:v:44:y:2018:i:c:p:471-479 is not listed on IDEAS
    2. repec:eee:ecmode:v:67:y:2017:i:c:p:34-44 is not listed on IDEAS
    3. repec:blg:reveco:v:69:y:2017:i:3:p:42-56 is not listed on IDEAS
    4. 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.
    5. repec:eee:ecofin:v:44:y:2018:i:c:p:289-313 is not listed on IDEAS

    More about this item

    Keywords

    Bank ratings; subprime crisis effect; financial and environmental risk factors; ordered probit models.;

    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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