Credit Rating Changes’ Impact on Banks: Evidence from the US Banking Industry
49 Pages Posted: 2 Jul 2010 Last revised: 5 Jan 2012
Date Written: December 2011
This study examines the impact of credit rating upgrades and downgrades on six comprehensive banks’ asset classes, profitability, leverage and size using data from the Federal Deposit Insurance Corporation’s call reports and Bloomberg over the period 1989-2008. In summary, the results suggest that a downgrade has a lasting and relatively more severe impact on banks than an upgrade; however, downgraded banks do not seem to effectively reduce their appetite for risk over a longer horizon. It seems that the role of credit rating agencies as an integral part of banks’ prudential supervision through market discipline is, in a longer horizon, overstated.
Keywords: Credit rating changes, banks, market discipline
JEL Classification: C21, D80, G21, G28
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