We investigate how banks’ internal ratings were affected by the first lockdown shock in Italy (March-June 2020). Using monthly proprietary data from a regional bank between October 2019 and January 2022, and adding credit registry data and balance sheet data of client firms, we estimate the lockdown effect on the change in six different ratings assigned by the bank to client firms in June 2020 and December 2020. We obtain three main results. First, controlling for both supply and demand factors, the lockdown is associated with a decline in four of the six ratings. Second, the lockdown effect also depends on specific firm characteristics, i.e. the lockdown effect appears to be mitigated in the presence of high turnover or for firms belonging to essential sectors. However, these interaction effects do not hold for all ratings, suggesting that each type of rating is influenced by different firm characteristics. Third, once we consider a full interaction model, the lockdown effect disappears in the medium term.
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