Non-performing loans and sovereign credit ratings

Abstract

This paper examines the joint behaviour of sovereign ratings and their macroeconomic/financial determinants (namely uncertainty, GDP growth, government debt-to-GDP ratio, investment-to-GDP ratio and the fiscal balance-to-GDP ratio) in a multivariate Panel Vector Autoregressive (PVAR) framework. We reveal another channel of interconnection between sovereign and banking credit risk by identifying a two-way relationship between non-performing loans (NPLs) and sovereign ratings. Generalized impulse response functions (GIRFs) provide evidence of significant effects from NPLs on sovereign rating decisions over and above the effects of the remaining economic/financial variables. At the same time, sovereign rating decisions impact on NPLs and all other variables.

Assessing methodology of banks' ratings and their competitive positions: overview of main rating agencies

“…Also, some authors strongly believe that major credit rating agencies failed in their assessments before crisis and even more, they deepened and generated the crisis (Baghai et al, 2014;Ryan, 2012;Boumparis et al, 2017;De Moor et al, 2018;Boumparis et al, 2019). All this raises the question of how much to trust rating agencies if, in the most critical moments, they have proven to be slow or have given incorrect assessments.…”

“…External factors can strongly influence the default risk of banks. For example, World Economic Outlook published from International Monetary Fund (IMF) announced the possibility of a crisis reducing global Growth compared to 2018 (from 3,7 to 3,5%) (Boumparis et al, 2019), which can jeopardize financial conditions in international financial markets. For banks in the international market, this may mean a downgrade in rating.…”

“…In our opinion, this sounds reasonable due to the prolonged reaction of credit rating agencies nearly before the world crisis and their wrong evaluating of companies (banks) and instrument ratings. Even more, some authors argued that credit rating agencies default in prediction of corporates defaults in 2008 (Baghai et al, 2014;Ryan, 2012) or accelerated sovereign debt crisis in European Union in 2009-2010 or they question subjectivity in their assessment methods (Boumparis et al, 2017(Boumparis et al, , 2019De Moor et al, 2018). However, there is another problem with this issue.…”

Sovereign Credit Rating Determinants of the EU Countries: The Role of the Euro Area Crisis and Its Legacy

“…They show that NPLs are the single most influential sector-specific variable, the increase of which is likely to adversely affect sovereign risk assessment. Boumparis, Milas, and Panagiotidis (2019), using a panel of 72 countries from 1998 through 2016, identify a feedback loop between sovereign credit ratings and banking risk factors. Finally, Chari, Garcés, Martínez, and Valenzuela (2019) investigate the relationship between financial fragility, global factors, and sovereign credit risk in a group of emerging market economies.…”

“…Afonso, Gomes, & Rother, 2010;Erdem & Varli, 2014). The panel VAR (Boumparis et al, 2019) and Bayesian methods (Brůha & Kočenda, 2018) are among the less frequently used estimation techniques. In this study, the construction of the dependent variable, as presented in the previous section, does not allow it to be treated in a discrete, ordinal nature.…”