Impact of the subprime crisis on bank ratings: The effect of the hardening of rating policies and worsening of solvency

• This study analyses the impact of the subprime crisis on the behaviour of the ratings issued for banks of Spain.
• This analysis determines the contribution of banks’ solvency and the rating policy effect to the adjustment on ratings.
• We find that on average the ratings of the banks have worsened by 13%.
• 3/4 of the adjustment is due to deterioration of the solvency levels and 1/4 to the hardening of the rating policy.
• This provides evidence for the affirmations of the stability report of the International Monetary Fund (2010).

This paper studies the impact of the subprime crisis on the ratings issued by the rating agencies in evaluating the solvency of banks. After ascertaining a significant worsening of ratings after the crisis, the paper hypothesises the possibility that this worsening is due not exclusively to a deterioration in the banks’ credit quality, but also to a change in the behaviour of the rating agencies. The study designs a methodology to separate the observed change in ratings into two multiplicative components: one associated with the deterioration of the banks’ solvency itself and another associated with the change in the agencies’ valuation criteria. The methodology is applied to the Spanish Banking System during the period 2000–2009. The results obtained show that the observed lowering of ratings (10.88%) is explained (75%) by the deterioration in the solvency of the banks, but also (25%) by the hardening of the valuation criteria adopted by the agencies. This shows the procyclical character of ratings.