Post-crisis banking regulation and credit rating adjustments. How did the bail-in affect Eurozone banks' credit rating?

Abstract

This paper looks at the credit rating adjustments on Eurozone banks that followed the post-crisis regulation of bank resolution in Europe in 2014. The empirical assessment analyses within-bank variation using the credit ratings of the major Eurozone banks. The analysis shows that with the introduction of the bail-in: 1) the ratings of Eurozone banks, as expected, were subject to downward pressures; 2) however, credit rating agencies (CRAs) reacted in a variety of ways, moving to post bail-in ratings for Eurozone banks that were more homogenous across CRAs than pre bail-in ratings. While the credit rating adjustments are rightly justified by the rating methodologies used, the convergence among CRAs suggests some degree of discretion in assigning the rating. These results are consistent with herding behaviour among CRAs.