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# 5.2 The case of banks

In order to highlight the difference between bank and non-bank ratings, we replicate the previous set of estimates also for banks. Although, in a large number of cases, bank deposit ratings are a mechanical reflection of sovereign ratings, it is useful to verify to what extent this rule applies in equal measure to HIUCs and NHICs. The bank panel contains observations referring to Moody's long term bank deposits ratings for 959 banks from 57 countries. Country-wise, 73.4 per cent of the banks are based in highincome countries holding a median rating equal to 80.4 (or just above Al), which compares with 44.5 (or just below Ba2) for rated banks in NHICs. This entails that bank ratings are generally higher than non-bank ones in both high-income and NHICs.

Table 7 reports the results for the same five specifications of the panel regression'<sup>6</sup> used for non-banks. The results of the first specification show that rating changes for bank i at time t are negatively related to the rating of bank i at time _t-1_ (RATING(T-1)); they are strongly positively related to sovereign rating changes at time t (ASOVEREIGN) and they also depend positively on the level of sovereign ratings at time _t-1_ (SOVEREIGN(T-1)).17 As in the non-bank panel, the negative and significant coefficient of the dummy for NHICs (NONHINCM DUMMY) suggests that rating changes are generally smaller in their absolute size-but not necessarily in relative terms-in these countries.

Similar to the results obtained for non-banks, the second specification adds the new variable NONHINCM*ASOVEREIGN, in order to check whether sensitivity to sovereign rating changes is larger for banks in NHICs. Results are interesting. Although ASOVEREIGN is still significant, its coefficient drops from 0.80 to 0.28, while NONHINCM*ASOVEREIGN is significant and exhibits a large coefficient (0.65). This implies that bank rating changes are sensitive to sovereign rating changes in both high and NHICs but the sensitivity in the former countries is much smaller than in the latter countries (0.28 against 0.93).

In full conformity with the non-bank panel, the third specification includes the additional variable NONHINCM*ASOVEREIGN*DOWNSOV, i.e. the variable singling out only sovereign downgradings for NHICs. Although the results differ with respect to the non-bank panel, in qualitative terms they point to the same direction. First, ASOVEREIGN is still significant, and its coefficient doesn't change substantially with respect to the second specification (0.27 instead of 0.28). Second, NONHINCM*ASOVEREIGN is still significant too but its coefficient drops from 0.65 to 0.48. Third, NONHINCM*ASOVEREIGN*DOWNSOV is significant and its coefficient

**16** Specifically, we consider the year-minimum rating for the banks of the following 57 countries: Argentina, Australia, Austria, Belgium, Brazil, Canada, Chile, China, Colombia, Czech Republic, Denmark, Ecuador, Egypt, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, India, Indonesia, Ireland, Italy, Japan, Jordan, Kazakhstan, Korea, Lebanon, Luxembourg, Malaysia, Malta, Mauritius, Mexico, Morocco, Netherlands, Norway, Oman, Pakistan, Panama, Peru, Philippines, Poland, Portugal, Romania, Russia, Singapore, Slovak Republic, Slovenia, Spain, Sweden, Switzerland, Taiwan, Thailand, Tunisia, Turkey, UK, USA.

**17** As noted above, here we can identify a long-term relation between bank and sovereign ratings, which is equal to 1 in the first specification, to 0.83 in the second, and to 0.67 in the third.

_Ferr, Liu,_ **_and_** _Majnoni,_ **_"The_** _Role ofRating Agency Assessments_ **_in_** _Less Developed Countries:_ **_Impact_** _of_ **_the_** _Proposed Basel_ **_Guidelines_**