Rating systems, procyclicality and Basel II: an evaluation in a general equilibrium framework
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 banksâ€™ 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 banksâ€™ preferences about point in time or through the cycle rating systems depend on the banksâ€™ characteristics and on the business cycle conditions in terms of expectations and realizations.
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Volume (Year): 6 (2010)
Issue (Month): 1 (January)
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