Impact of COVID-19 on European banks’ credit ratings

Abstract

The aim of this paper is to analysis the impact of the COVID-19 pandemic on European banks’ default risks, as measured by foreign long-term issuer credit ratings published by the main credit rating agencies. Two hypotheses are put forward: (1) The macroeconomic situation has a stronger negative impact on banks’ financial conditions during COVID-19; (2) changes in the capital adequacy, assets, management, earnings, and liquidity indicators have a significant impact on changes in banks’ credit ratings. The analysis has been prepared for the 2000–2021 period for listed and unlisted banks on the European stock exchanges, that received long-term issuer credit ratings from the main credit rating agencies. To the analysis have been used the ordered logit panel data models and the research has been made on the first differences to analyse the impact of the changes of the financial and macroeconomic conditions on the credit ratings changes. The obtained results suggest a direct and significant impact of the COVID-19 pandemic on the credit rating changes, but a delayed reaction.