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Split credit ratings of banks in times of crisis

Published Online:pp 254-280https://doi.org/10.1504/IJBAAF.2020.106716

This paper analyses whether opacity of bank creditworthiness increases during crisis periods and if the conservativeness of CRAs changes through business cycles. Univariate and multivariate methodologies are used: data from Moody's and S&P on credit ratings and watch status for 133 commercial banks across 17 developed countries from 2007 to 2015 is employed. The univariate analysis is a unique technique that provides a new perspective to assess whether splits between CRAs are defined as permanent or temporary. The evidence demonstrates that Moody's and S&P frequently disagree. S&P is shown to be the more conservative CRA overall, however, the extent to which Moody's issues higher ratings decreases over time until it becomes the more conservative CRA. The paper is the first of its kind to establish that the conservativeness of Moody's and S&P changes throughout business cycles, which should impact on the strategic decision making of investors.

Keywords

credit ratings, credit rating agencies, split ratings, watchlist, banks, financial crises, sub-prime crisis, ambiguity, opacity, creditworthiness, time-weighted splits, Moody's, S&P, times of crisis, European sovereign crisis