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The Effects of Ratings-Contingent Regulation on International Bank Lending Behavior: Evidence from the Basel 2 Accord

In: Information Spillovers and Market Integration in International Finance Empirical Analyses

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  • Iftekhar Hasan
  • Suk-Joong Kim
  • Eliza Wu

Abstract

We investigate the effects of credit ratings-contingent financial regulation on foreign bank lending behavior. We examine the sensitivity of international bank flows to debtor countries’ sovereign credit rating changes before and after the implementation of the Basel 2 risk-based capital regulatory rules. We study the quarterly bilateral flows from G-10 creditor banking systems to 77 recipient countries over the period Q4:1999 to Q2:2013. We find direct evidence that sovereign credit re-ratings that lead to changes in risk-weights for capital adequacy requirements have become more significant since the implementation of Basel 2 rules for assessing banks’ credit risk under the standardized approach. This evidence is consistent with global banks acting via their international lending decisions to minimize required capital charges associated with the use of ratings-contingent regulation. We find no evidence to suggest that banking regulation induced foreign lending has heightened the perceived sovereign credit risks of recipient countries.

Suggested Citation

  • Iftekhar Hasan & Suk-Joong Kim & Eliza Wu, 2018. "The Effects of Ratings-Contingent Regulation on International Bank Lending Behavior: Evidence from the Basel 2 Accord," World Scientific Book Chapters, in: Information Spillovers and Market Integration in International Finance Empirical Analyses, chapter 16, pages 547-603, World Scientific Publishing Co. Pte. Ltd..
  • Handle: RePEc:wsi:wschap:9789813223585_0016
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    Cited by:

    1. Gopalakrishnan, Balagopal & Jacob, Joshy & Pandey, Ajay, 2018. "Lender Moral Hazard in State-owned Banks: Evidence from an Emerging Economy," IIMA Working Papers WP 2018-07-01, Indian Institute of Management Ahmedabad, Research and Publication Department.
    2. Drago, Danilo & Gallo, Raffaele, 2017. "The impact of sovereign rating changes on European syndicated loan spreads: The role of the rating-based regulation," Journal of International Money and Finance, Elsevier, vol. 73(PA), pages 213-231.
    3. Drago, Danilo & Gallo, Raffaele, 2016. "The impact and the spillover effect of a sovereign rating announcement on the euro area CDS market," Journal of International Money and Finance, Elsevier, vol. 67(C), pages 264-286.
    4. Jess N. Cornaggia & Kimberly J. Cornaggia & John E. Hund, 2017. "Credit Ratings Across Asset Classes: A Long-Term Perspective," Review of Finance, European Finance Association, vol. 21(2), pages 465-509.
    5. Cai, Peilin & Kim, Suk-Joong & Wu, Eliza, 2019. "Foreign direct investments from emerging markets: The push-pull effects of sovereign credit ratings," International Review of Financial Analysis, Elsevier, vol. 61(C), pages 110-125.
    6. Gopalakrishnan, Balagopal & Jacob, Joshy & Mohapatra, Sanket, 2018. "Risk-sensitive Basel Regulations and Firms' Access to Credit: Direct and Indirect Effects," IIMA Working Papers WP 2018-10-03, Indian Institute of Management Ahmedabad, Research and Publication Department.

    More about this item

    Keywords

    Currency Intervention; Macroeconomic News; International Capital Flows; Sovereign Credit Rating;

    JEL classification:

    • F30 - International Economics - - International Finance - - - General

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