In Essay 1 titled, “Governance and Bank Credit Ratings”, we examine whether the element of corporate governance is considered in the published bank credit ratings by the three principal CRAs. Our evidence is drawn by controlling for bank financial characteristics and sovereign ratings that prior research has shown to be related to credit ratings. Evidence is initially drawn using principal components drawn from PCA analysis of all available governance variables, and then results are confirmed using a selection of governance variables that formulate our base model for governance in bank ratings. Similar evidence to that for governance variables is presented using a set of country institutional components, and lastly we examine changes in relationship between governance variables and bank credit ratings for any of the three principal CRAs for the periods before and after the global financial crisis.
In Essay 2 titled "Structural Shifts in Bank Credit Ratings”, we examine the time-series variation in bank rating standards of the three principal CRAs for the period 1990-2015, for different geographical regions. We distinguish three structural breaks in the bank rating standards dividing the time-span of our analysis to the period before and after the 2001-2 high profile corporate collapses when credit rating standards tightened, the period before the global financial crisis started when bank credit rating standards loosened, and the period after the global financial crisis when bank credit rating standards tightened. Fitch has followed a constant tightening of bank rating standards throughout, while this ‘trend’ was intensified after the global financial crisis. This pattern for Fitch is more intense for European, and US and Canadian banks. Moody’s and Standard & Poor’s were rather more aligned in the structural shifts of their rating standards for the period under investigation. For Moody’s the loosening of bank rating standards in the pre global financial crisis period is more evident for European banks, compared to the US and Canadian banks, while the hardening of bank rating standards in the post global financial crisis period is more intense for European, US and Canadian banks, and not evident for the rest of the world banks. For Standard & Poor’s the loosening of bank rating standards in the pre global financial crisis period is almost the same for all geographical regions, while the hardening of bank rating standards in the post global financial crisis period is very intense for the US and Canadian banks, and much less intense for European, US and Canadian banks. Lastly, in the presence of competition, Fitch gives higher credit ratings for US, Canadian and RoW banks.
Essay 3 discusses an alternative explanation to that of tightening rating standards. In Essay 3, titled “Stickiness in Bank Credit Ratings”, we examine the existence of stickiness in bank rating standards that could have been caused by the lack of timeliness in bank rating. The results support our assumption that bank ratings by the three principal CRAs are sticky. Another main finding is that there is clear evidence of asymmetry between upgrade and downgrade decisions in bank ratings by all three principal CRAs, with upgrades becoming increasingly difficult while downgrades remaining the same. Further evidence includes a further asymmetry with respect to high versus low credit quality bank ratings, and the existence of chronological structural breaks in stickiness practices of bank rating standards.
|Date of Award||20 Jan 2020|
|Supervisor||Andreas Krause (Supervisor)|
- Bank credit ratings
- Bank governance
- Structural shifts
- Stickiness in credit ratings