The Impact of Sovereign Rating News on European Banks

Abstract

This paper examines the spillover effect of Eurozone sovereign rating changes announced by Standard and Poor's, Moody's, and Fitch on domestic bank share prices in the period 2002–2012. This spillover effect appears negative in the case of downgrades, but insignificant for upgrades. Surprisingly, announcement of sovereign negative credit watches results in increased bank stock returns. Bank share price losses following sovereign downgrades increase as bank leverage, efficiency, and equity performance increase, and they decrease as bank systematic risk and payout ratio increase. On the contrary, bank share prices rise following sovereign negative credit watches, as leverage and bank size decrease and as bank systematic risk increases.

Does competition improve sovereign credit rating quality?

“…Fitch's emerging global status has been investigated in the literature. Previous studies have examined the informativeness of Fitch's sovereign credit ratings for financial markets in comparison to Moody's and S&P (e.g., Afonso et al, 2012;Alsakka and ap Gwilym, 2012;Caselli et al, 2016;Livingston and Zhou, 2016), while other studies have explored the economic role of Fitch's ratings in the corporate bond market (e.g., Bongaerts et al, 2012). In the sovereign rating industry, Fitch has also become a major rival to Moody's and S&P. In 1994, Fitch assigned sovereign ratings for only 20 countries, which is less than half the number of countries that were rated by Moody's or S&P. Since then, the market share gap between Fitch and the two-leading global CRAs has been shrinking, whereby the gap was reduced from 11% in 2000 to 1.5% by 2016 (see Table 1).…”

The rating spillover from banks to sovereigns: An empirical investigation across the European Union

“…Previous research employs different dates as starting points of the European sovereign debt crisis (see e.g. Beirne and Fratzscher, 2013;Bhanot et al, 2014;Caselli et al, 2016). We take January 2009 as the starting month of the European sovereign debt crisis and include the time period afterwards as a part of the ongoing crisis for two reasons: first, the GIIPS countries (Greece, Italy, Ireland, Portugal and Spain) reported substantial increases in fiscal deficit levels in 2009 (Lane, 2012), while European banks start to increase sovereign debt holdings of their origin country in the first quarter of 2009(Singh et al, 2016; second, the bank-to-sovereign contagion effect and feedback loop is relevant for the European countries throughout the crisis period until at least 2015 (Vergote, 2016).…”

Sovereign Exposures of European Banks: It Is Not All Doom

“…However, banks have been accused to disproportionately invest in bonds issued by their home sovereign, especially in periods of sovereign stress (see, e.g., Horvath et al 2015). It is argued that some banks built up excessive exposures, thereby creating a 'doom loop' between European banks and their sovereigns and exacerbating the risk of contagion between sovereigns and banks (see, e.g., Acharya et al 2014;Brunnermeier et al 2016;Caselli et al 2016;De Bruyckere et al 2013;Farhi and Tirole 2018;Fratzscher and Rieth 2019;Stângȃ 2014).…”