ABSTRACT
The growth in the importance of bank credit ratings has resulted in great part from two of the classic catalysts for ratings: growth of the capital markets and bank failures. In the USA the S&L (Savings & Loan) crisis and the expansion of the bank CD (Certificate of Deposit) market gave boosts to US bank ratings. The development of the Euromarkets provided the first strong international expansion of ratings apart from just the highest quality sovereign issuers. With the globalization of capital, bank risk moved into the uncharted waters of emerging markets where ensuing crises in Latin America, South-East Asia and Russia highlighted the importance of sovereign risk in overall bank risk assessment. For example, Russia was never rated above the B+ category by BankWatch. As the sovereign ceiling, this meant that all banks in Russia could not be rated any higher than B+ which is one of the highest risk categories. BankWatch comment:
Issues rated B show a higher degree of uncertainty and therefore greater likelihood of default than higher-rated issues. Adverse developments could negatively affect the payment of interest and principal on a timely basis.
Yet top management and members of the Boards of many of the most sophisticated financial institutions found exposures which way outweighed their (and their shareholders') risk appetites, because of ignoring two important emerging market bank issues: the convergence of risk of sovereign and banking systems as well as the risks of purchased funding.