Bank rating migrations before and since the onset of the financial crisis

Abstract

ABSTRACT This paper analyses bank rating dynamics in Europe and the United States from 2000 to 2016. In particular, two questions are addressed: (i) whether the rating agencies replicate prior changes in ratings made by other agencies (the lead-lag strategy) and (ii) whether previous rating signals (changes in ratings and in watchlist status) issued by an agency influence the likelihood of that agency making further rating changes (rating momentum). The results obtained constitute further evidence of the interdependence between the downgrades and upgrades issued by pairs of agencies. This interdependence increased significantly since the onset of the global financial crisis, when banks experienced a significant deterioration in their financial situation and the rating agencies were in the spotlight. The results also provide evidence that rating momentum is an important factor in predicting future rating actions and that, following the onset of the crisis, agencies are more likely to conduct subsequent downgrades than upgrades. Therefore, the findings suggest that rating dynamics are good predictors of upcoming rating actions, and that CRAs adopted more conservative behaviour since the onset of the crisis.