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The Sovereign Effect on Bank Credit Ratings

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  • Yu-Li Huang
  • Chung-Hua Shen

Abstract

We investigate the effect of sovereign credit ratings on bank credit ratings, known as the sovereign effect. Our study differs from the literature in three respects. First, we examine whether bank ratings below, at, or above the sovereign ceiling impact the sovereign effect. We find that the sovereign effect holds in all cases. Next, we consider the asymmetric impact of the sovereign effect on bank ratings with or without the ceiling effect. We find that a downgrade exhibits a stronger sovereign effect than an upgrade. Third, we examine whether the asset deterioration or the stable foreign fund hypotheses are possible explanations for the sovereign effect. Our results support both hypotheses. Copyright Springer Science+Business Media New York 2015

Suggested Citation

  • Yu-Li Huang & Chung-Hua Shen, 2015. "The Sovereign Effect on Bank Credit Ratings," Journal of Financial Services Research, Springer;Western Finance Association, vol. 47(3), pages 341-379, June.
    • Handle: RePEc:kap:jfsres:v:47:y:2015:i:3:p:341-379
    DOI: 10.1007/s10693-014-0193-7
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    2. Yu-Li Huang & Chung-Hua Shen & Kun-Li Lin, 2022. "Did the rating standard for banks change after the crisis?," Review of Quantitative Finance and Accounting, Springer, vol. 58(4), pages 1617-1663, May.
    3. Huang, Yu-Li & Shen, Chung-Hua, 2019. "Effect of interbank activities on bank risk: Why is China different?," The Quarterly Review of Economics and Finance, Elsevier, vol. 74(C), pages 308-327.
    4. Klusak, Patrycja & Alsakka, Rasha & Gwilym, Owain ap, 2017. "Does the disclosure of unsolicited sovereign rating status affect bank ratings?," The British Accounting Review, Elsevier, vol. 49(2), pages 194-210.
    5. Salvador, Carlos & Fernández de Guevara, Juan & Pastor, José Manuel, 2018. "The adjustment of bank ratings in the financial crisis: International evidence," The North American Journal of Economics and Finance, Elsevier, vol. 44(C), pages 289-313.
    6. Huang, Yu-Li & Shen, Chung-Hua, 2021. "From revenue to safety: Rating agencies have changed their concerns after the crisis," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 73(C).
    7. Le, Richard & Ku, Hyejin, 2022. "Reducing systemic risk in a multi-layer network using reinforcement learning," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 605(C).
    8. Nidhaleddine Ben Cheikh & Oussama Ben Hmiden & Younes Ben Zaied & Sabri Boubaker, 2021. "Do sovereign credit ratings matter for corporate credit ratings?," Annals of Operations Research, Springer, vol. 297(1), pages 77-114, February.
    9. Abad, Pilar & Alsakka, Rasha & ap Gwilym, Owain, 2018. "The influence of rating levels and rating convergence on the spillover effects of sovereign credit actions," Journal of International Money and Finance, Elsevier, vol. 85(C), pages 40-57.
    10. John A. Ruddy, 2021. "An Analysis of Bank Financial Strength Ratings and Credit Rating Data," Risks, MDPI, vol. 9(9), pages 1-16, August.
    11. Williams, Gwion & Alsakka, Rasha & ap Gwilym, Owain, 2015. "Does sovereign creditworthiness affect bank valuations in emerging markets?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 36(C), pages 113-129.
    12. Meriläinen, Jari-Mikko & Junttila, Juha, 2020. "The relationship between credit ratings and asset liquidity: Evidence from Western European banks," Journal of International Money and Finance, Elsevier, vol. 108(C).
    13. Jones, Laurence & Alsakka, Rasha & ap Gwilym, Owain & Mantovan, Noemi, 2022. "Regulating rating agencies: A conservative behavioural change," Journal of Financial Stability, Elsevier, vol. 60(C).

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    More about this item

    Keywords

    Sovereign credit rating; Bank credit rating; Sovereign ceiling; Asymmetric adjustment; G15; G21;
    All these keywords.

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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