An Analysis of Bank Financial Strength Ratings and Credit Rating Data

John A. Ruddy

doi:10.3390/risks9090155

Abstract

In this study, data from two credit rating agencies are analyzed to consider how different Bank Financial Strength Ratings and Credit Ratings from two rating agencies compare. To my knowledge, prior research has not analyzed Bank Financial Strength Ratings from different rating agencies, nor has it compared Bank Financial Strength Ratings to general credit ratings. These facts make this research unique. Univariate analyses are utilized to show relationships in the ratings data, along with parametric and non-parametric tests to make statistical inferences about the ratings data. There are five findings. First, ratings from different rating agencies are highly correlated. Second, different types of ratings from the same rating agency are highly correlated. Third, bank financial strength ratings are more conservative than credit ratings. Fourth, bank financial strength ratings declined in rating more quickly at the start of the financial crisis. Fifth, bank financial strength ratings from the Kroll Bond Rating Agency were more conservative than ratings from Moody’s Investors Service. The research findings and results are important for investors who consider ratings agency data to determine the risk of banking institutions. The results are also important to businesses that rely on bank credit rating data and policy makers who regulate banking institutions.

Highlights

Bank Financial Strength Ratings (BFSRs) are a type of rating provided by Nationally
Analyses and RIecsoumltpsare BFSRs to other BFSRs and BFSRs to general credit ratings to see if any associaI conduct anatliyosnessetxoisctobnestiwdeeernthNeRrSeRlaOtiroantisnhgisp.s in the NationallyRecognized Statistical Rating Organizations (NRSRO) data
Compare BFSRs to other BFSRs and BFSRs to general credit ratings to see if any associations exist between NRS3R.1O

Summary

Introduction

Bank Financial Strength Ratings (BFSRs) are a type of rating provided by NationallyRecognized Statistical Rating Organizations (NRSRO). Bank Financial Strength Ratings (BFSRs) are a type of rating provided by Nationally. BFSRs provide detailed metrics regarding a given bank’s capital levels, asset quality, earnings, and liquidity. These variables, while not unique to banks, carry greater importance for banks than for non-banking entities. This research considers BFSRs from the Kroll Bond Rating Agency (KBRA) and Moody’s Investors Service (Moody’s). KBRA provides BFSRs on most U.S commercial banks. In 1995, Moody’s was the first NRSRO to issue BFSRs. It provided BFSRs to businesses that were seeking information on the safety and soundness of other financial institutions. Moody’s issued BFSRs in response to bank credit profile requests that ignored external support sources such as affiliated institutions or government aid. The research utilized accounting and other financial data to predict BFSRs

Methods

Discussion

Conclusion