Impact of COVID-19 on European Banks’ Credit Ratings

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. Credit ratings are especially significant during a crisis in relation to the basic interest rates published by central banks, bond interest rates, price purchasing parity, and the government debt ratio. Another significant impact occurs with regard to capital adequacy and the quality of assets. A raising effect has also been noted in relation to earnings and liquidity indicators. This relationship occurs based on a few reasons. The first is the decreased value of the central banks’ interest rates, which has a direct impact on the banks’ interest revenues, especially in developing countries and those outside the Eurozone. The decreasing value of the interest accrued on deposits has a direct impact on the withdrawal of money by depositors and their investment of these deposits, such as on the real estate or capital markets. As a result, the stability of the deposit base is important during the first stage of a crisis. Furthermore, another, less significant impact on the quality of assets and capital adequacy indicators in relation to banks’ credit rating changes relates to the relaxing of the Basel III requirements by the national regulators. The direct financial support provided by governments reduces companies’ default risks in the first stage of a crisis. The impact of the quality of assets and, in particular, increased loan loss provisions and non-performing loans has a delayed impact.