Abstract
This paper analyses whether opacity of bank creditworthiness increases during crisis periods and if the conservativeness of CRAs changes through business cycles. Univariate and multivariate methodologies are used: data from Moody's and S&P on credit ratings and watch status for 133 commercial banks across 17 developed countries from 2007 to 2015 is employed. The univariate analysis is a unique technique that provides a new perspective to assess whether splits between CRAs are defined as permanent or temporary. The evidence demonstrates that Moody's and S&P frequently disagree. S&P is shown to be the more conservative CRA overall, however, the extent to which Moody's issues higher ratings decreases over time until it becomes the more conservative CRA. The paper is the first of its kind to establish that the conservativeness of Moody's and S&P changes throughout business cycles, which should impact on the strategic decision making of investors.
Highlights
Introduction ‘Credit rating agencies play a crucial role in providing information about the ability and willingness of issuers, including governments and private firms, to meet their financial obligations’ (Almeida et al [2016] p.255)
During the sub-prime crisis Credit ratings agencies (CRAs) disagree 80% of the time for North American banks, the results show a larger level of disagreements for European banks (82%) during the same period
A positive coefficient suggests a reason for more splits and these results suggest that if a country’s sovereign rating is split there is more likely to be a disagreement between CRAs for a bank rating in that country
Summary
Introduction ‘Credit rating agencies play a crucial role in providing information about the ability and willingness of issuers, including governments and private firms, to meet their financial obligations’ (Almeida et al [2016] p.255). Exhibit 4 uses the 20-notch scale and further supports the results of the 60-point scale, CRAs agree 39.73% of the time in the post-crisis period compared with 23.47% and 25.95% in the sup-prime and European crises.
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