'Bank systemic risk: An analysis of the sovereign rating ceiling policy and rating downgrades
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2024-06-13
Date
2022Type
Journal Article
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Md Abdul, W. and Pham, T.P. and Ralf, Z. 2022. 'Bank systemic risk: An analysis of the sovereign rating ceiling policy and rating downgrades. Journal of Business Finance and Accounting.
Source Title
Journal of Business Finance and Accounting
ISSN
Faculty
Faculty of Business and Law
School
School of Accounting, Economics and Finance
Collection
Abstract
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.
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