First-mover disadvantage: The sovereign ratings mousetrap. CEPS Working Document No 2020/02, February 2020

Using 102 sovereigns rated by the three largest credit rating agencies (CRA), S&P, Moody’s and Fitch between January 2000 and January 2019, we are the first to document that the first mover CRA (S&P) in downgrades falls into a commercial trap. Namely, each first-mover downgrade by one notch by S&P results in a 2.4% increase in the probability of a rating contract being cancelled by the sovereign client, and a 1.2% decrease in the ratio of S&P’s sovereign rating coverage relative to Moody’s. The more first-mover downgrades S&P makes, the more their sovereign rating coverage declines relative to Moody’s. This paper interrelates three themes of the literature: herding behaviour amongst CRAs, issues of conflict of interest and ratings quality

Do personal connections improve sovereign credit ratings?

In a large sample of sovereign debt issues, we show that a personal connection between senior executives in credit rating agencies and leading politicians in the sovereign results in an improved rating. A test on bond yields suggest that the personal connection reflects a favorable treatment of the issuer

THe impact of recent regulatory reforms of the rating industry

This Thesis investigates the recent regulatory reforms applied to the credit ratings industry in Europe and the US. It analyses the impact on credit rating agencies (CRAs) and financial markets. The prior literature on CRA regulation is focused on the US markets and is limited to investigations of competition between CRAs. The impact of recently implemented regulations for CRAs in Europe has received very little academic attention and presents a highly topical research avenue. This Thesis makes several novel contributions to the literature, including (i) critical perspectives on the new regulation, especially in the EU; (ii) the impact of the solicitation status of sovereign ratings upon bank ratings; and (iii) whether European Securities Markets Authority (ESMA) rating identifiers affect the quality of ratings. Several methodologies are applied to enhance the robustness of the findings, including ordered probit analyses, fixed effects models, covariate matching (CVM) and propensity score matching (PSM). An extensive sample of rating actions by the largest CRAs (Fitch, Moody’s and S&P) during 2006 to 2014 is utilised. The critical review of the EU’s CRA regulation sheds light on several shortcomings and raises a need for reassessment. Some assumptions presented by the European Commission (EC) lack underlying evidence and are subjective in nature. Disclosures by CRAs have been inconsistent, which may reflect ambiguity in the regulations. Compliance with new regulation has affected the CRAs’ operating costs, which confirms earlier fears expressed by CRAs. Additional evidence is presented relating to CRAs’ business models. The second empirical chapter identifies that changes to the solicitation status of sovereigns induced by new disclosure rules have an adverse effect on banks domiciled in these countries. This has policy implications for regulators and banks since the ceiling effect identified in the study can lead to higher costs and harm the intermediaries. In the final empirical chapter, ESMA’s requirement for rating identifiers is questioned since it does not have any discernible impact on the quality of ratings reported by CRAs. This finding is of interest to policymakers, market participants and academics since the quality of ratings is linked to banking regulation and affects financial stability

The impact of ESMA regulatory identifiers on the quality of ratings

This paper investigates the impact of the introduction of ESMA credit rating identifiers on the quality of ratings. These identifiers form part of the disclosure requirements placed upon credit rating agencies (CRAs) since 2012 under a new EU regulatory regime and have not featured in any prior empirical literature. Rating informativeness is gauged from bond market data. Using a rich dataset of sovereign rating actions by the three major CRAs for 70 countries during the period 2006–2016, we find that the ESMA requirement for identifiers yields varying outcomes across downgrades and upgrades. The rating quality associated with downgrades by Moody's improves, whereas upgrades by S&P, Moody's and Fitch are of lower quality. These results are consistent with greater conservatism in rating policies after the regulatory reforms. ESMA's additional focus on analyst location does not reveal any consistent difference in the quality of ratings

Does the disclosure of unsolicited sovereign rating status affect bank ratings?

This paper integrates three themes on regulation, unsolicited credit ratings, and the sovereign-bank rating ceiling. We reveal an unintended consequence of the EU rating agency disclosure rules upon rating changes, using data for S&P-rated banks in 42 countries between 2006 and 2013. The disclosure of sovereign rating solicitation status for 13 countries in February 2011 has an adverse effect on the ratings of intermediaries operating in these countries. Conversion to unsolicited sovereign rating status transmits risk to banks via the rating channel. The results suggest that banks bear a penalty if their host sovereign does not solicit its ratings

Corporate sensitivity to sovereign credit distress : the mitigating effects of financial flexibility

Acknowledgements We are indebted to the Editor, Associate Editor, and anonymous reviewers for their insightful suggestions.Peer reviewe

Sovereign credit ratings during the COVID-19 pandemic

Acknowledgments: We would like to thank anonymous referees for their comments and Thang Ngoc Dang and Lucia Murgia for their invaluable research assistance.Peer reviewedPostprin

Rising Temperatures, Falling Ratings: The Effect of Climate Change on Sovereign Creditworthiness

Enthusiasm for ‘greening the financial system’ is welcome, but a fundamental challenge remains: financial decision makers lack the necessary information. It is not enough to know that climate change is bad. Markets need credible, digestible information on how climate change translates into material risks. To bridge the gap between climate science and real-world financial indicators, we simulate the effect of climate change on sovereign credit ratings for 108 countries, creating the world’s first climate-adjusted sovereign credit rating. Under various warming scenarios, we find evidence of climate-induced sovereign downgrades as early as 2030, increasing in intensity and across more countries over the century. We find strong evidence that stringent climate policy consistent with limiting warming to below 2°C, honouring the Paris Climate Agreement, and following RCP 2.6 could nearly eliminate the effect of climate change on ratings. In contrast, under higher emissions scenarios (i.e., RCP 8.5), 63 sovereigns experience climate-induced downgrades by 2030, with an average reduction of 1.02 notches, rising to 80 sovereigns facing an average downgrade of 2.48 notches by 2100. We calculate the effect of climate-induced sovereign downgrades on the cost of corporate and sovereign debt. Across the sample, climate change could increase the annual interest payments on sovereign debt by US$22–33 billion under RCP 2.6, rising to US$ 137–205 billion under RCP 8.5. The additional cost to corporates is US$7.2–12.6 billion under RCP 2.6, and US$ 35.8–62.6 billion under RCP 8.5

Climate Change and Fiscal Sustainability: Risks and Opportunities

Both the physical and transition-related impacts of climate change pose substantial macroeconomic risks. Yet, markets still lack credible estimates of how climate change will affect debt sustainability, sovereign creditworthiness, and the public finances of major economies. We present a taxonomy for tracing the physical and transition impacts of climate change through to impacts on sovereign risk. We then apply the taxonomy to the UK's potential transition to net zero. Meeting internationally agreed climate targets will require an unprecedented structural transformation of the global economy over the next two or three decades. The changing landscape of risks warrants new risk management and hedging strategies to contain climate risk and minimise the impact of asset stranding and asset devaluation. Yet, conditional on action being taken early, the opportunities from managing a net zero transition would substantially outweigh the costs

Generalised fracture mechanics approach to the interfacial failure analysis of a bonded steel-concrete joint

Steel-concrete joints are often made by welded shear studs. However, this connection reduces the fatigue strength, especially in situations where locally concentrated loads occur with a large number of load cycles e.g. in bridge decks. In this paper the shear bond strength between steel and ultra-high performance concrete (UHPC) without welded mechanical shear connectors is evaluated through push-out tests and a generalized fracture mechanics approach based on analytical and finite element analyses. The connection is achieved by an epoxy adhesive layer gritted with granules. In the tests, specimens made with various manners of preparation of the epoxy interlayer are tested experimentally. Numerical-analytical 2D and 3D modelling of a steel-concrete connection is performed without and with the epoxy interlayer. The model of a bi-material notch with various geometrical and material properties is used to simulate various singular stress concentrators that can be responsible for failure initiation. Thus conditions of crack initiation can be predicted from knowledge of the standard mechanical and fracture-mechanics properties of particular materials. Results of the fracture-mechanics studies are compared with each other and with experimental results. On the basis of the comparison, the 2D simulation of the steel-concrete connection without the epoxy interlayer is shown to be suitable for the estimation of failure conditions