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Bank Capital Regulation with an Opportunistic Rating Agency

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  • Matthias Efing

    (Ecole Polytechnique Fédérale de Lausanne, Swiss Finance Institute, University of Geneva, and CESifo (Center for Economic Studies and Ifo Institute for Economic Research))

Abstract

This paper models the strategic interaction between a rating agency, a bank and a bank regulator who lacks information about bank asset risk. The regulator can either (1) make bank capital requirements contingent on credit ratings; or (2) set rating independent capital requirements. Truthful ratings provide efficiency gains because they allow the regulator to constrain high risk bank investment without simultaneously reducing overall investment volume. However, if collusion between the rating agency and the bank corrupts rating quality, rating independent regulation enhances welfare. The welfare benefits are largest if regulators maintain rating contingent capital requirements and discipline rating agencies.

Suggested Citation

  • Matthias Efing, 2012. "Bank Capital Regulation with an Opportunistic Rating Agency," Swiss Finance Institute Research Paper Series 12-19, Swiss Finance Institute.
  • Handle: RePEc:chf:rpseri:rp1219
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    Cited by:

    1. Efing, Matthias & Hau, Harald, 2015. "Structured debt ratings: Evidence on conflicts of interest," Journal of Financial Economics, Elsevier, vol. 116(1), pages 46-60.
    2. Harald Hau & Sam Langfield & David Marques-Ibanez, 2013. "Bank ratings: what determines their quality? [Bank risk during the financial crisis: do business models matter?]," Economic Policy, CEPR;CES;MSH, vol. 28(74), pages 289-333.
    3. Efing, Matthias, 2015. "Arbitraging the Basel securitization framework: Evidence from German ABS investment," Discussion Papers 40/2015, Deutsche Bundesbank.
    4. Marta Allegra Ronchetti, 2018. "Preliminary credit ratings and contact disclosure," Discussion Papers 2018/02, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).

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    More about this item

    Keywords

    Bank Regulation; Lucas Critique; Collusion; Ratings Inflation; Risk-shifting;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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