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The role of banking portfolios in the transmission from currency crises to banking crises - potential effects of Basel II

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Tobias Knedlik
Johannes Stöbel

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Abstract

This paper evaluates the potential effects of the Basel II accord on preventing the transmission from currency crises to financial crises. By analyzing the case study of South Korea, it shows how mismatches on banks’ balance sheets were the primary cause for such a transmission, and models how Basel II would have affected those balance sheets. The paper shows that due to South Korea’s positive credit rating in the months leading up to the crisis, the regulatory capital reserves under Basel II would have been even lower than those under Basel I, and that therefore Basel II would have had adverse effects on the development of the crisis. In the second part, the article analyses whether the behavior of rating agencies has changed since their failure to predict the Asian crisis. The paper finds no robust econometric evidence that rating agencies have started to take micromismatches into account when assigning sovereign ratings. Thus, given the current approach of credit rating agencies, we have reservations concerning the effectiveness of Basel II to prevent the transmission from currency crises to banking crises, both for the case of South Korea and for potential future crises.

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Paper provided by Halle Institute for Economic Research in its series IWH Discussion Papers with number 21-06.

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Date of creation: Dec 2006
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Handle: RePEc:iwh:dispap:21-06

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Related research
Keywords: Asian Financial Crisis; Bank Portfolios; Currency Mismatch; Maturity Mismatch; Basel II; Credit Ratings;

Find related papers by JEL classification:
F3 - International Economics - - International Finance
F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General
G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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