Corporate Credit Ratings, Banking Fragility, and Sovereign Credit Risk

Abstract

Using corporate credit rating data and a new metric of the expected joint loss of the banking sector conditional on a systemic event (JLoss), this study documents a positive association between corporate credit risk and domestic banking fragility. It also documents that the relationship between corporate and sovereign credit ratings amplifies during periods of banking distress. These results emphasize that regulators and governments must ensure low levels of risk in the banking sector and the public finances to improve firms’ access to international debt markets.

Keywords: banking fragility, corporate credit risk, credit ratings, sovereign risk