Impact of sovereign credit ratings on systemic risk and the moderating role of regulatory reforms: An international investigation

This paper investigates the association between systemic risk and sovereign credit ratings issued by the three credit rating agencies (CRAs), i.e., Moody's, S&P, and Fitch, for 65 countries from Jan-2000 to Dec-2020. Results show that a positive (negative) sovereign rating action (SRA) is associated with a significant decline (increase) in the systemic risk. However, variations exist among the three CRAs as Moody's actions are associated with a larger impact, followed by S&P and Fitch. Furthermore, results show an asymmetric response of systemic risk towards negative rating signals. Analyzing the effect of regulatory reforms to reduce the shock element in the announcement of sovereign rating signals provides mixed results. After the regulatory reforms, only S&P's overall rating actions impact the systemic risk, but the asymmetrical response persists for all CRAs. These results have certain policy implications for regulators, bank managers, and other stakeholders of financial systems.