Change search
CiteExportLink to record
Permanent link

Direct link
Cite
Citation style
  • apa
  • harvard1
  • ieee
  • modern-language-association-8th-edition
  • vancouver
  • Other style
More styles
Language
  • de-DE
  • en-GB
  • en-US
  • fi-FI
  • nn-NO
  • nn-NB
  • sv-SE
  • Other locale
More languages
Output format
  • html
  • text
  • asciidoc
  • rtf
Bank capitalization and credit rating assessment: Evidence from the EBA stress test
Jönköping University, Jönköping International Business School.
2016 (English)Independent thesis Advanced level (degree of Master (One Year)), 15 credits / 22,5 HE creditsStudent thesis
Abstract [en]

Banks face market pressure when determining their capital structures because they are subject to strict regulations. CFOs are willing to adjust their company’s capital structures in order to obtain higher ratings. The credit ratings are highly valuable not only because they assess the creditworthiness of the borrowers but also because those agencies take advantage of the information asymmetry and have access to data that companies might not disclose publicly. Also, this industry gained much interest after the BIS proposals back in 1999 and 2001 that the Basel Committee on Banking Supervision should consider the borrower’s credit ratings when examining banks’ solvency and adequacy.

Factors used to determine the credit ratings are banks’ asset quality which is fundamental measure for the creditworthiness, banks’ capital which is related to the asset quality in relation to the RWA, banks’ profitability, and liquidity measurements.

The purpose of this paper is to investigate whether the banks that keep excess equity to balance sheet receive better credit ratings, given the predictors capital, banks size and defaulted to total exposures. The European Banking Authority (EBA) stress test results are used as a benchmark for determining banks’ capital adequacy and solvency, whereas the credit ratings are obtained shortly after the EBA’s reports publication. The sample size is 73 and 95 banks for the years 2011 and 2014, respectively.

The results from the multivariate ordinal regression do not show significant correlation results between the excess equity to balance sheet and the credit ratings, even though the estimated coefficient is negative, namely excess equity is associated with lower credit ratings. An explanation to this one can find in the low-quality capital relative to the banks’ capital base. Also, banks which plan to implement risker projects or currently hold risker assets are subject to higher capital requirements. Moreover, banks currently being rated low but with the potential of being upgraded would be more willing to issue equity than debt in order to avoid the corresponding risk and achieve the higher rating. The equity ratio and the defaulted to total exposures ratio show significant correlation to the banks’ credit ratings.

Overall, since the results of the regression are insignificant, we do not have reasons to believe that holding excess equity is not beneficial for banks. When banks make changes in their leverage ratios they would either carry the cost of being downgraded or the cost related to issuing more equity, therefore at the end they will balance the leverage ratio close to the optimal and keep as much capital as required by regulations. 

Place, publisher, year, edition, pages
2016. , 46 p.
Keyword [en]
Bank capitalization, Moody’s credit rating assessment, EBA stress test, capital structures, banks adequacy and solvency, excess equity
National Category
Business Administration
Identifiers
URN: urn:nbn:se:hj:diva-30455ISRN: JU-IHH-FÖA-2-20160251OAI: oai:DiVA.org:hj-30455DiVA: diva2:935663
Subject / course
IHH, Business Administration
Presentation
2016-05-31, B3052, Gjuterigatan 5, Jönköping, 13:50 (English)
Examiners
Available from: 2016-06-21 Created: 2016-06-11 Last updated: 2016-06-21Bibliographically approved

Open Access in DiVA

fulltext(1097 kB)138 downloads
File information
File name FULLTEXT01.pdfFile size 1097 kBChecksum SHA-512
2fe471a8d6698f1e3f9b06f0ac8c4ed17381e4c781fa7dec93a7b54b19e864fafd4725e654250645100f156b4165c83c17af9755f5b30652141054e5ff3e1596
Type fulltextMimetype application/pdf

By organisation
Jönköping International Business School
Business Administration

Search outside of DiVA

GoogleGoogle Scholar
Total: 138 downloads
The number of downloads is the sum of all downloads of full texts. It may include eg previous versions that are now no longer available

urn-nbn

Altmetric score

urn-nbn
Total: 194 hits
CiteExportLink to record
Permanent link

Direct link
Cite
Citation style
  • apa
  • harvard1
  • ieee
  • modern-language-association-8th-edition
  • vancouver
  • Other style
More styles
Language
  • de-DE
  • en-GB
  • en-US
  • fi-FI
  • nn-NO
  • nn-NB
  • sv-SE
  • Other locale
More languages
Output format
  • html
  • text
  • asciidoc
  • rtf