The impact of sovereign rating actions on bank ratings in emerging markets

Does sovereign creditworthiness affect bank valuations in emerging markets?

“…Williams et al (2013) also show that banks in countries with less government control are more likely to be downgraded following sovereign rating downgrades. Hence, for countries which experience negative rating actions, we expect the negative effect on bank valuation to be stronger in countries with less government control over their banking systems.…”

“…Alsakka et al (2014) analyse the linkages between European sovereign and bank ratings, and find that sovereign rating downgrades and negative watch signals significantly 6 impact bank rating downgrades during the global financial crisis. Williams et al (2013) show that bank ratings in emerging market are particularly sensitive to sovereign rating actions, and have very high probabilities of being upgraded (downgraded) following an upgrade (downgrade) to their home sovereign. Banks' capital requirements can be tied to their credit ratings, therefore sovereign upgrades (downgrades) can lead to bank upgrades (downgrades), which subsequently can reduce (increase) a bank's cost of capital.…”

“…(2) Higher values indicate fewer restrictions on banking freedoms. Williams et al (2013) show that the lower the country's financial freedom score (stronger government control), the more likely are bank ratings of emerging countries to follow recent sovereign rating upgrades.…”

“…Because emerging market bank ratings are strongly related to their sovereign ratings (e.g. Williams et al, 2013), actions on the sovereign rating affect banks' cost of capital, their capital requirements, government guarantees and to some extent their profitability from lending/borrowing decisions. This paper investigates whether changes in sovereign creditworthiness affect the stock market valuations of banks in emerging markets.…”

The Development of an Alternative Method for the Sovereign Credit Rating System Based on Adaptive Neuro-Fuzzy Inference System

“…As a result of the multiple regression analysis, GDP per capita, internal debt, current account balance and human development which was adapted to inequity, affected debt discharging liability negatively and unemployment and political stability affected debt discharging liability positively. [15] searched the reasons of change of credit ratings in developing markets and how changes of credit ratings in countries affected the bank credibility. Credit rating changes were used as dependent variable and economic freedom index, corruption perception index, property rights, income per capita, inflation, current account balance, financial balance and external debt were used as independent variable.…”