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An empirical investigation of the determinants and impact of bank credit ratings

Karimu, Bolanle Abubakar



The role of credit rating agencies has come under severe scrutiny following the recent financial crisis, due to their claim, ab initio, of assigning true creditworthiness in the form of rating notches to financial institutions and their instruments. The over reliance of the market, and in particular of traders, investors and regulators, on external credit ratings contribute to the laxity and the herd behaviour of many of these market participants. The credit rating agencies have become a central theme of academic research and in particular, in the investigation of the ratings they assign and the effects of their rating actions on the market.
This thesis investigates three empirical issues in the field of bank credit rating in an international setting. First, it models the financial and non-financial determinants of bank credit ratings. Second, it examines the impact of news announcements concerning bank credit rating changes, that is, upgrades and downgrades, on the performance of bank stock. Lastly, the thesis examines the trends in bank credit rating over time by focusing on rating migration within the historical pattern of both ratings and rating changes.
The thesis reveals that the assignment of credit ratings to international banks is driven heavily by the CAMELS. The inclusion of non-financial variables, such as the too-big-to-fail, adds to the explanatory power of the rating determinant models. In addition, the thesis reveals that there is asymmetry in the reaction of the market to rating actions. It finds significant positive market reactions to subsamples of bank upgrades. Downgrades generally elicit significant negative market reactions. Finally, the results provide evidence of downward momentum in the rating migration of banks over time. In addition, it reveals the importance of duration in a rating notch on the likelihood of a bank migrating to another state. Generally, the longer a rated bank stays in a particular rating notch, the lower its probability of transiting to another rating notch.


Karimu, B. A. An empirical investigation of the determinants and impact of bank credit ratings. (Thesis). University of the West of England

Thesis Type Thesis
Keywords empirical investigation, determinants, impact, bank credit ratings


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