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

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Open access
Authors
Md Abdul, Wasi
Pham, Thu Phuong
Ralf, Zurbruegg
Date
2022
Type
Journal Article

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Citation
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
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ISSN
Faculty
Faculty of Business and Law
School
School of Accounting, Economics and Finance
Remarks

This is the peer reviewed version of the following article: Wasi, M. A., Pham, T. P., & Zurbruegg, R. (2022). Bank systemic risk: An analysis of the sovereign rating ceiling policy and rating downgrades. Journal of Business Finance & Accounting, 00, 1– 30, which has been published in final form at https://doi.org/10.1111/jbfa.12637. This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Use of Self-Archived Versions.

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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.