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

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  • Roman Kraeussl

    (Center for Financial Studies, Frankfurt am Main, Germany)

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 financing. 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 convergence between investment-grade and speculative-grade borrowers. This conclusion is based on the lateness and cyclical determination of credit rating agencies’ sovereign risk assessments and the continuing incentives for short-term rather than long-term interbank lending ingrained in the proposed Basel II framework.

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Bibliographic Info

Paper provided by University of Crete, Department of Economics in its series Working Papers with number 0315.

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Length: 39 pages
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Handle: RePEc:crt:wpaper:0315

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Keywords: Sovereign Risk; Credit Ratings; Basel II;

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Cited by:
  1. Petr Teply & Milan Matejašák, 2007. "Regulation of Bank Capital and Behavior of Banks: Assessing the US and the EU-15 Region Banks in the 2000-2005 Period," Working Papers IES 2007/23, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Aug 2007.

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