The introduction of Basel II has raised concerns about the potential impact of risk-sensitive capital requirements on the business cycle. Several approaches have been proposed to assess the procyclicality issue. In this paper, we adopt a general equilibrium model and conduct comprehensive analysis of different proposals. We set out a model that allows to evaluate different rating systems in relation to the procyclicality issue. Our model extends previous models by analysing the effects of different rating systems on banks’ portfolios (as in Catarineu-Rabell et al. 2005) and the contagion effects relevant to financial stability (as in Goodhart et al. 2005). The paper presents comparative statics results comparing a cycle-dependent and a neutral rating system from the point of view of banks profit maximization. Our results suggest that banks’ preferences about point in time or through the cycle rating systems depend on the banks’ characteristics and on the business cycle conditions in terms of expectations and realizations.
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Paper provided by Oxford Financial Research Centre in its series OFRC Working Papers Series with number
2008fe27.
References listed on IDEAS 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.:
Charles A.E. Goodhart & Pojanart Sunirand & Dimitrios P. Tsomocos, 2005.
"A risk assessment model for banks,"
Annals of Finance,
Springer, vol. 1(2), pages 197-224, 09.
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