Macroeconomic aspects of banks’ credit ratings

  • Patrycja Chodnicka-Jaworska University of Warsaw
Keywords: country credit rating, bank credit rating, country risk, macroeconomic determinants

Abstract

Research background: The practical analysis suggests that credit ratings are especially significant for banks. The literature review suggests that in previous analysis researchers usually took into consideration financial factors of the banks’ credit ratings methodology. This article analyses the impact of macroeconomic factors on the banks’ credit ratings.
Purpose of the article: The paper examines and analyses the impact of the macroeconomic risk factors on the credit ratings received by banks. In the article, the methodology of credit risk assessment proposed by Moody’s Investor Service and Standard and Poor’s Financial Service is presented. Two hypotheses are put herein. The first one is: Changes in countries’ credit ratings convey new information and influence on banks’ financial condition. The second hypothesis is: A highly-developed, stable economy with an advanced financial market has a positive influence on banks’ credit rating assessment.
Methods: The study used banks’ and countries’ ratings assigned by Standard and Poor's and Moody's for the period from 1 January 2005 to 1 January 2016. To verify the hypotheses static panel data models have been applied.
Findings and Value added: In credit rating agencies guidelines and previous research, the impact of countries’ credit ratings on those received by banks is not indicated. The impact of macroeconomic factors has not been verified. The analysis confirms that changes in countries’ credit ratings convey new information and influence the banks’ environment condition. But only for the assessment given by S and P the condition of banking sector is an important group of factors. For all verified types of credit ratings the risk of country is presented by countries’ credit rating, not by particular factors. These analyses suggest that during the risk estimation process prepared by banks, a country’s risk represented by its credit ratings should be taken into consideration more often than particular macroeconomic factors.

References

Auh, J. K. (2015). Procyclical credit rating policy. Georgetown McDonough School of Business Research Paper, 2581738. doi: 10.2139/ssrn.2581738.
Barell, R., & Hassan, O. A. G. (2013). Accounting for the determinants of banks’ credit ratings. Economics and Finance Working Paper Series, Brunel University of London Working Paper, 13-02.
Bissoondoyal-Bheenick, E., & Treepongkaruna, S. (2011). An analysis of the determinants of bank ratings: comparison across ratings agencies. Australian Journal of Management, 36(3). doi:10.1177/0312896211426676.
Bolton, P., Freixas, X., & Shapiro, J. (2012). The credit ratings game. Journal of Finance, 67(1). doi: 10.1111/j.1540-6261.2011.01708.
White, L. (2010). Markets: the credit rating agencies. Journal of Economic Perspectives, 24(2). doi:10.1257/jep.24.2.211.
Cesaroni, T. (2015). Procyclicality of credit rating systems: how to manage it? Journal of Economics and Business, 82(C).
Chodnicka-Jaworska, P. (2015). Credit rating determinants for European countries. Global Journal of Management and Business, 15(9-C).
Delko, K. (2002). Harte Kritik an den Rating-Agenturen. Neue Zürcher Zeitung, 3(29).
Ferri, G., Liu, L. G., & Stiglitz, J. E. (2003). The procyclical role of rating agencies: evidence from the East Asian crisis. Economic Notes, 28(3). doi: 10.1111/1468-0300.00016.
Freitag, L. (2015). Procyclicality and path dependence of sovereign credit ratings: the example of Europe. Economic Notes, 44(2). doi: 10.1111/ecno.12032.
Gogas, P., Papadimitriou, T., & Agrapetidou, A. (2015). Forecasting bank credit ratings. Journal of Risk Finance, 15(2). doi: 10.1108/JRF-11-2013-0076.
Hau, H., Langfield, S., & Marques-Ibanez, D. (2013). Bank ratings: what determines their quality? Economic Policy, 28(74). doi: 10.1111/1468-0327.12009.
Hunt, J. (2009). Credit rating agencies and the ’worldwide credit crisis’: the limits of reputation, the insufficiency of reform, and a proposal for improvement. Columbia Business Law Review, 1.
Kraussl, R. (2001). Sovereign ratings and their impact on recent financial crises. International Advances in Economic Research, 7(2), doi: 10.1007/BF022 96020.
Kraussl, R. (2003). Sovereign risk, credit ratings and the recent financial crises in emerging markets: empirical analysis and policy implications. Fritz Knapp Verlag, Frankfurt/Main.
Kräussl R. (2005). Do credit rating agencies add to the dynamics of emerging market crises? Journal of Financial Stability, 1(3). doi:10.1016/j.jfs.2005.02.005.
Van Laere, E., Vantieghem, J., & Baesens, B. (2012). The difference between Moody’s and S&P bank ratings: is discretion in the rating process causing a split?. RMI Working Paper No. 12/05.
Livingston, M., Wei, J., & Zhou, L. (2010). Moody’s and S&P ratings: are they equivalent? Conservative ratings and split rated bond yields. Journal of Money Credit and Banking, 42.
Moody’s investors service (2016). Rating methodology. Banks
Moody’s investors service (2015). Rating methodology. Sovereign bond ratings.
Moody’s investors service (2013). Rating methodology. Sovereign bond ratings.
Ötker-Robe, I., & Podpiera, J. (2010). The fundamental determinants of credit default risk for European large complex financial institutions. IMF Working Paper, 10(153).
Packer, F., & Tarashev, N. (2011). Rating methodologies for banks. BIS Quarterly Review, June.
Poon, W. (2003a). Are unsolicited bank ratings lower after controlling for financial and sovereign risk? Unpublished working paper, Lingnan University, Hong Kong.
Poon, W. (2003b). Are unsolicited credit ratings biased downward. Journal of Banking & Finance, 27. doi: 10.1016/S0378-4266(01)00253-9.
Poon, W., Firth, M., & Fung, H. G. (1999). A multivariate analysis of the determinants of Moody’s bank financial strength ratings. Journal of International Financial Markets, Institutions and Money, 9.
Shen, C. H., Huang, Y. L., & Hasan, I. (2012). Asymmetric benchmarking in bank credit rating. Journal of International Financial Markets, Institutions and Money, 22(1). doi: 10.1016/j.intfin.2011.08.004.
Standard & Poor’s rating services. (2011). Banking industry country risk assessment methodology and assumptions.
Sy, A. (2009). The systemic regulation of credit rating agencies and rated markets. IMF Working Paper, 09(129). doi: 10.5089/9781451872767.001.
White, L. J. (2010). Credit rating agencies and the financial crisis: less regulation of CRAs is a better response. Journal of International Banking Law and Regulation, 25(4).
Published
2017-03-31
How to Cite
Chodnicka-Jaworska, P. (2017, March 31). Macroeconomic aspects of banks’ credit ratings. Equilibrium. Quarterly Journal of Economics and Economic Policy, 12(1), 101-120. https://doi.org/https://doi.org/10.24136/eq.v12i1.6
Section
Financial markets