Stability and accuracy of credit ratings

Abstract

This paper examines the stability and accuracy of credit ratings from two Norwegian savings and loans banks, labeled Bank A and Bank B. Credit Rating Agencies (CRAs) often claim that ratings are relative rankings of firms and largely independent of the business cycle. We find that the intensity of banks’ rating changes – both upgrades and downgrades – vary over time depending on the business cycle. This is inconsistent with characterizing their methodology as through-the-cycle. We further find that the volatility and accuracy of Bank B – the bank with more customers exposed to the petroleum industry – seems to be higher than that of Bank A. The accuracy of Bank B’s ratings also appears to be less affected by economic slowdowns than those of Bank A. Whereas Bank A’s accuracy drops significantly following the oil price shock in 2014–2015, the accuracy of Bank B remains more stable.