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A Critique on the Proposed Use of External Sovereign Credit Ratings in Basel II

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Roman Kraeussl () (Vrije Universiteit Amsterdam)

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Abstract

This paper deals with the proposed use of sovereign credit ratings in the "Basel Accord on Capital Adequacy" (Basel II) and considers its potential effect on emerging markets financ-ing. It investigates in a first attempt the consequences of the planned revisions on the two central aspects of international bank credit flows: the impact on capital costs and the volatility of credit supply across the risk spectrum of borrowers. The empirical findings cast doubt on the usefulness of credit ratings in determining commercial banks’ capital adequacy ratios since the standardized approach to credit risk would lead to more divergence rather than conver-gence between investment-grade and speculative-grade borrowers. This conclusion is based on the lateness and cyclical determination of credit rating agencies’ sovereign risk assess-ments and the continuing incentives for short-term rather than long-term interbank lending ingrained in the proposed Basel II framework.

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Paper provided by Center for Financial Studies in its series CFS Working Paper Series with number 2003/23.

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Length: 41 pages
Date of creation: 23 Jan 2003
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Handle: RePEc:cfs:cfswop:wp200323

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Related research
Keywords: Sovereign Risk; Credit Ratings; Basel II;

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Find related papers by JEL classification:
E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation
G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Roman Kraeussl, 2003. "A Critique on the Proposed Use of External Sovereign Credit Ratings in Basel II," CFS Working Paper Series 2003/23, Center for Financial Studies. [Downloadable!]
    Other versions:
  2. repec:bep:mactop:v:6:y:2006:i:2:p:1375-1375 is not listed on IDEAS
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