Credit rating downgrades and systemic risk

Kladakis, George; Skouralis, Alexandros

Abstract

We examine whether changes in issuer credit ratings by the three main providers are associated with changes in systemic risk. First, we find that rating downgrades result in an increase in bank systemic risk, whereas upgrades do not proportionally reduce systemic risk. Second, we document that the positive relationship between rating downgrades and systemic risk can be mitigated by accounting-based stability factors, such as profitability and capital, but also enhanced by sovereign rating downgrades. Finally, we show that sovereign rating downgrades have a greater effect on bound banks’ systemic risk compared to non-bound banks.

Citation

Kladakis, G., & Skouralis, A. (2024). Credit rating downgrades and systemic risk. Journal of International Financial Markets, Institutions and Money, 90, Article 101902. https://doi.org/10.1016/j.intfin.2023.101902

• Journal Article Type: Article
• Acceptance Date: Dec 7, 2023
• Online Publication Date: Dec 9, 2023
• Publication Date: 2024-01
• Deposit Date: Dec 10, 2023
• Publicly Available Date: Dec 11, 2023
• Journal: Journal of International Financial Markets, Institutions and Money
• Print ISSN: 1042-4431
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 90
• Article Number: 101902
• DOI: https://doi.org/10.1016/j.intfin.2023.101902
• Keywords: Credit rating agencies, Rating downgrades, Systemic risk, Banks
• Public URL: http://researchrepository.napier.ac.uk/Output/3419870