The impact of the sovereign debt crisis on the activity of Italian banks

We examine the implications of the sovereign debt tensions on the Italian credit market by estimating the effect of the 10-year BTP-Bund spread on a wide array of bank interest rates, categories of loans and income statement variables. We exploit the heterogeneity between large and small intermediaries to assess to what extent the transmission of sovereign risk differed in relation with different banks’ balance-sheet characteristics and business strategies. Regarding the cost of funding, we find that changes in the BTP-Bund spread have a sizeable effect on the interest rates on term deposits and newly issued bonds but virtually no effect on overnight deposits. Furthermore, the sovereign spread significantly affects the cost of credit for firms and households and exerts a negative effect on loan growth. All these results are magnified when considering alone the five largest banks, which are typically less capitalized, have a larger funding gap and incidence of bad loans and rely more on non-traditional banking activities. Sovereign tensions also affect the main items of banks’ income statement.     

The impact of the European sovereign debt crisis on banks stocks. Some evidence of shift contagion in Europe

This paper analyzes the influence of the recent European sovereign debt crisis on banks’ equity returns for 15 countries. Our data span the period December 14th 2007 - March 8th 2013 that encompasses several episodes of economic and financial turmoil since the collapse of the subprime credit market. Our contribution to the literature is twofold. First, we use an explicit multifactor model of equity returns extended with a sovereign risk factor. Second, we adopt a Smooth Transition Regression (STR) framework that allows for an endogenous definition of crisis periods and captures the changes in parameters associated with shift contagion. We find that the negative impact of the European sovereign debt crisis on banks’ equity returns has been mostly confined to European banks, whereas U.S. banks appear to be unharmed by its direct impact and may even have benefited from it. Besides, we find some evidence of shift contagion across Europe.     

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

This paper analyses the effects of sovereign rating actions on the credit ratings of banks in emerging markets, using a sample from three global rating agencies across 54 countries for 1999–2009. Despite widespread attention to sovereign ratings and bank ratings, no previous study has investigated the link in this manner. We find that sovereign rating upgrades (downgrades) have strong effects on bank rating upgrades (downgrades). The impact of sovereign watch status on bank rating actions is much weaker and often insignificant. The sensitivity of banks’ ratings to sovereign rating actions is affected by the countries’ economic and financial freedom and by macroeconomic conditions. Ratings of banks with different ownership structures are all influenced strongly by the sovereign rating, with some variation depending on the countries’ characteristics. Emerging market bank ratings are less likely to follow sovereign rating downgrades during the recent financial crisis period.     

The systemic risk of European banks during the financial and sovereign debt crises

European banks became a source of risk to global financial markets during the financial crisis and attention to the European banking sector increased during the sovereign debt crisis. To measure the systemic risk of European banks, we calculate a distress insurance premium (DIP), which integrates the characteristics of bank size, probability of default, and correlation. Based on this measure, the systemic risk of European banks reached its height in late 2011 around €500 billion. We find that this was largely due to sovereign default risk. The DIP methodology is also used to measure the systemic contribution of individual banks. This approach identifies the large systemically important European banks, but Italian and Spanish banks as a group notably increased in systemic importance during the sample period. Bank-specific fundamentals like capital-asset ratios predict the one-year-ahead systemic risk contributions.     

The impact and the spillover effect of a sovereign rating announcement on the euro area CDS market

This paper analyzes the impact and the spillover effect of a sovereign rating announcement on the euro area CDS market. Through the event study technique, we demonstrate that downgrades and upgrades considerably affect financial markets. The relevance of the impact is due to the introduction of “new” information after a rating change announcement (information discovery effect) and to the role of rating in the current financial regulation (certification effect). Conversely, the CDS market does not seem to react significantly to rating warning (outlook and review) announcements. Furthermore, we find evidence of a spillover effect only after a downgrade announcement. Our results show that the size of the spillover effect is influenced by economic and financial conditions of analyzed countries and that international bank flows between EMU Members represent an important transmission channel of the spillover effect.     

The reaction of emerging market credit default swap spreads to sovereign credit rating changes

This paper examines the effect of sovereign credit rating change announcements on the CDS spreads of the event countries, and their spillover effects on other emerging economies’ CDS premiums. We find that positive events have a greater impact on CDS markets in the two-day period surrounding the event, and are more likely to spill over to other emerging countries. Alternatively, CDS markets anticipate negative events, and previous changes in CDS premiums can be used to estimate the probability of a negative credit event. The transmission mechanisms for positive events are the common creditor and competition in trade markets.     

The impact of rating changes in Australian financial markets

Credit ratings have only a limited role in Australian financial regulation, so the effects of rating changes on financial prices can be observed largely free from regulatory effects. We find that bond and stock prices move in the ‘expected’ direction following both positive and negative rating announcements, although the movements are small. Announcement effects are larger for small firms, for downgrades from investment to speculative grade, and where agencies have not previously indicated the rating is under review. Overall, the results suggest that agencies are not generally viewed as consistently having access to important information that is not already in the public domain.     

New evidence on sovereign to corporate credit rating spill-overs

We explore what happens to domestic firm-level ratings around the time of a sovereign-rating action on a day-by-day and country-by-country basis. Our granular approach provides banks and investors with a fuller picture of their sovereign credit risk exposure and, as such, our analysis might feed into banks' internal modelling of their credit risk exposure for the purpose of determining regulatory capital, introduced under Basel II. We also provide a novel analysis of any bias in spill-over and we show that, inter alia, the tendency for greater spill-over of negative sovereign-rating actions can largely be accounted for by firm- and sovereign-level factors. However, even after allowing for these factors, some countries suffer from negative bias. The implied higher correlation between sovereign and firm-level ratings in times when countries are in crisis versus when they are in recovery may contribute to quicker and/or deeper crises versus slower and/or longer recoveries.     

The impact of distressed economies on the EU sovereign market

Financially distressed economies inside the European Union (EU) are being blamed for producing a general increase in borrowing costs. This article analyzes the channels of default risk transmission within the EU countries using the information content in the sovereign Credit Default Swap (CDS) market. We proceed in two directions. First, we test the existence of cross-border volatility effects between the central and the peripheral EU countries. Second, we explore the effect of distressed economies on the default and risk premium constituents of sovereign default swaps. We show a significant volatility spillover from distressed to central European Economic and Monetary Union (EMU) economies. This causality pattern leads to a significant impact on the default swap risk premia. On average, the risk premium accounts for approximately 42% of central EMU spreads and 56% of the spreads for those countries outside of the EMU. The peripheral risk also affects the default component of central economies, although its impact is lower.     

Bank systemic risk: An analysis of the sovereign rating ceiling policy and rating downgrades

We investigate the impact that the sovereign ceiling policy has on financial stability. In the event of a sovereign rating downgrade, we find that the rating agencies' sovereign ceiling policy leads to a disproportionate downgrade of the most creditworthy financial institutions in the economy and results in increased systemic risk. This asymmetric variation in bank ratings also impairs equity growth that further exacerbates bank insolvency. Our results are robust to several matching techniques, such as propensity score matching and entropy balancing, falsification tests, subsample analyses, alternative empirical proxies and model specifications.     

欧洲主权债务危机的发展与应对之策

受近期希腊债务违约风险上升、欧债危机向核心国蔓延、欧洲银行业融资缺口扩大等负面因素冲击,欧洲金融市场遭遇大幅动荡。文章指出,在短期内,防止希腊债务违约是遏制欧债危机进一步蔓延、防范债务危机与银行危机并发的关键;长期而言,欧元及欧盟运作机制的改革将不可避免,完善退出机制将是欧元区长期稳定运作的基石。     

The impact of monetary policy announcements on the stock price of large European banks during the financial crisis

Since 2007, the European Central Bank responded decisively to the challenges posed by the global financial crisis, reducing key policy interest rates to unprecedented low levels and intervening with non-standard policy measures (i.e., monetary easing and liquidity provision). This paper aims to assess the impact of ECB monetary policy announcements on the stock price of large European banks. As a first step, an event study is conducted in order to measure cumulated abnormal returns (CARs) around the announcements over June 2007–June 2013; the second step is a regression analysis aimed at identifying the determinants of CARs. Results show that banks were more sensitive to non-conventional measures than to interest rate decisions, and that the same type of intervention may have a different impact depending on the stage of the crisis. In addition, banks with weaker balance sheets and operating with high-risk were more sensitive to monetary policy interventions.     

Estimating the impact of exchange rate changes on the asset growth of multinational banks

The article develops an empirical model to explain how changes in exchange rates have affected the growth of total assets of a sample of the world's largest banks over the 17-year period of 1972–1989. The model was estimated over a period in which U.S. banks' assets grew less rapidly than the assets of large banks headquartered in other industrial countries. The model provides an estimate of the banks' allocation between home currency and foreign currency assets, which allows a calculation of the estimated impact of exchange rate changes on bank asset growth. The results of the model suggest that no single economic variable explains the faster growth of non-U.S. banks. Changes in real exchange rates were estimated to have had a significant but not overwhelming impact on bank asset growth through their impact on the dollar value of banks' home-currency assets. Other factors, such as faster home-country economic growth, an expanding trade and foreign investment sector, and the ability of large banks to retain their share of domestic intermediation, were also important factors in determining relative rates of bank asset growth.The views expressed in this article are those of the authors and should not be interpreted as representing the views of the Department of State, the Board of Governors of the Federal Reserve System, or its staff.     

The impact of bond rating changes on corporate bond prices: New evidence from the over-the-counter market

I study the information content of bond ratings changes using daily corporate bond data from TRACE. Abnormal bond returns over a two-day event window that includes the downgrade (upgrade) are negative (positive) and statistically significant, although the reaction to upgrades is economically small. Monthly abnormal bond returns around downgrades and upgrades are statistically significant but overstate the magnitude of the reaction relative to two-day abnormal returns. Unlike the bond market, the stock market reaction to upgrades is statistically insignificant. Evidence suggests that the differing inferences on the effect of upgrades in the two markets can be attributed to wealth transfer effects rather than relative market inefficiencies. In the cross-section, the bond market response is stronger for rating changes that appear more surprising, rating changes of lower rated firms, and upgrades that move the firm from speculative grade to investment grade.     

The impact of CRA agreements on community banks

We develop three empirical models to identify the impact of Community Reinvestment Act (CRA) agreements on the mortgage lending behavior of small banking institutions during the period 1990–1997. CRA agreements are pledges banking institutions make to extend levels of credit to targeted populations and are often used by institutions to reaffirm their commitment to the goals of the CRA. We hypothesize that CRA agreements increase the level of competition for mortgage loans in the targeted area, which in turn causes a reduction in the quantity of mortgage credit to be supplied by community banks. Consistent with the quantity hypothesis, the results show that CRA agreements are associated with less mortgage lending, including lending in lower-income communities (CRA lending) and in minority communities (minority lending), by small community lenders. Evidence does not support a second hypothesis – that community banks respond to the increased competition by providing credit to riskier individuals.     

The sovereign-bank rating channel and rating agencies' downgrades during the European debt crisis

We investigate the rating channel for the transmission of changes in sovereign risk to the banking sector, analysing data from Moody's, S&P and Fitch before and during the European debt crisis. Sovereign rating downgrades and negative watch signals have strong effects on bank rating downgrades in the crisis period. The impact is stronger for multiple-notch sovereign rating downgrades, and more pronounced in PIIGS countries. Secondly, we investigate rating agencies' competition in the banking sector during the same periods, finding significant differences in rating policies across the agencies. S&P credit actions tend to be the more independent ones, while Moody's appears to be more cautious, although it is by far the most likely to assign multiple-notch downgrades. In the pre-crisis period, we find no evidence that bank rating actions are linked to sovereign rating signals (nor vice versa) nor to prior bank rating changes by a competing agency.     

The determinants of sovereign credit spread changes in the Euro-zone

Using a database of Euro-denominated government bonds covering the period from January 2000 to December 2010, this paper provides an empirical analysis of the determinants of government credit spreads in the Euro-area. The analysis is divided into two sub-periods delimited by the global financial crisis that started in August 2007. We find evidence of a clear shift in the behavior of market participants from a convergence-trade expectation, based on market related factors, before August 2007, to one mainly driven by macroeconomic country-specific variables and an international common risk factor. There is no evidence of a significant role for the liquidity risk before or during the financial crisis period. Overall, our results give support to the Merton-type structural credit risk models and confirm that there are considerable similarities between the factors explaining the dynamics of the credit risk spreads and the factors driving the prices on the government bond markets.     

The intraday timing of rating changes

Using time stamps of Standard & Poor's rating changes, we examine the timing of rating changes in an intraday setting. Our evidence shows that although most rating changes occur during trading hours, the proportion of downgrades announced after regular trading hours is higher than that of upgrades. In addition, unexpected after-hour downgrades are associated with more negative stock returns and lower trading volume in comparison to those announced during trading hours. We also find that Standard & Poor's is more likely to announce downgrades after hours when downgrades are released on busy days with many concurrent rating announcements, when they concern financial firms, and when they are unexpected. In addition, Egan-Jones Ratings (EJR), an investor-paid credit rating agency, demonstrates a similar tendency in announcing downgrades after trading hours. This is the first study to document systematic differences in the timing of credit rating changes announced before and after the market closes. Our findings suggest that Standard & Poor's announces downgrades after trading hours to better disseminate information, and thus have important policy implications.     

我国商业银行的内部评级体系:实践及挑战

2004年,巴塞尔银行监管委员会出台了《统一资本计量和资本标准的国际协议:修订框架》(简称《巴塞尔新资本协议)》,确定了基于内部评级法的信用风险度量和资本金计算框架,使得内部评级体系作为银行经营管理的主线显得更加明确。在这一国际大背景下,我国大中型银行逐步借鉴国际银行业风险管理实践,加强了信用风险管理,初步建立了内部评级体系,积极准备实施《巴塞尔新资本协议》内部评级法。本文在把握我国银行内部评级体系建设实践的基础上,重点分析了部分银行内部评级体系在违约定义、评级结构、评级方法、评级流程等方面的特点,揭示了其与《巴塞尔新资本协议》内部评级法之间的差距。     

Systemic risk in the European sovereign and banking system

We investigate the systemic risk of the European sovereign and banking system during 2008–2013. We utilize a conditional measure of systemic risk that reflects market perceptions and can be intuitively interpreted as an entity’s conditional joint probability of default, given the hypothetical default of other entities. The measure of systemic risk is applicable to high dimensions and not only incorporates individual default risk characteristics but also captures the underlying interdependent relations between sovereigns and banks in a multivariate setting. In empirical applications, our results reveal significant time variation in systemic risk spillover effects for the sovereign and banking system. We find that systemic risk is mainly driven by risk premiums coupled with a steady increase in physical default risk.