This thesis analyses the effects of sovereign rating actions on banks in developed and emerging market countries using sovereign ratings data from S&P, Moody's and Fitch spanning 1999 to 2011. I use ordered probit modelling to analyse the impact of sovereign rating actions on bank ratings in emerging markets, and find that bank ratings are associated with very high probabilities of being upgraded (downgraded) following sovereign rating upgrades (downgrades). Local-privately owned banks are most likely to follow sovereign upgrades, whilst foreign owned banks are most likely to follow sovereign downgrades. Using an event day methodology I find that European sovereign rating actions have significant
spillover effects into the share prices of banks from other European countries i.e. a cross-border effect. Negative rating actions by S&P have a very immediate and negative impact on the bank share prices, whilst the effects are more delayed following negative rating actions by Moody's. Negative outlook and watch signals are found to be informative also. The effects from Fitch are weaker, with evidence that the markets mostly anticipate Fitch negative rating actions. Negative rating actions to emerging market sovereigns have significant negative impacts on the home-country bank share prices from all three agencies, and the effects are more pronounced following negative changes to outlook and watch for S&P and Fitch. Only S&P positive signals have positive effects on bank share prices in emerging markets.