Do credit ratings affect European banks’ equity capital?

Abstract

This study investigates the impact of credit rating changes on banks’ equity capital following the 2008 financial crisis. Using data describing European commercial banks and a robust generalized method of moments estimation method, we find a negative association between equity capital and bank ratings. Investors may perceive a rating downgrade as a signal from rating agencies about a bank’s financial stability. We confirm empirically that riskier European  banks are forced to hold higher equity, and that market risk rather than regulatory constraints significantly increases banks’ equity capital.