Rating targeting and the confidence levels implicit in bank capital
AbstractThe solvency standards implicit in bank capital levels, as reported eg in Jackson et al (2002), are much higher than those required for top ratings, if standard single period economic capital models are taken se-riously. We explain this excess capital puzzle by forward looking rating targeting behaviour by banks, which aims at maintaining rating above a minimum target in future periods. We calibrate to data on actual bank capital the confidence level used by the median US AA rated bank to maintain at least a single A rating. The calibrated confidence level is in line with the historical probability of an AA rated bank to be downgraded below A.
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Bibliographic InfoPaper provided by Bank of Finland in its series Research Discussion Papers with number 27/2006.
Length: 27 pages
Date of creation: 10 Dec 2006
Date of revision:
bank capital; credit rating; value-at-risk; economic capital; capital structure;
Find related papers by JEL classification:
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-01-23 (All new papers)
- NEP-BAN-2007-01-23 (Banking)
- NEP-RMG-2007-01-23 (Risk Management)
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