Credit ratings and the standardised approach to credit risk in Basel II
This paper focuses on the standardised approach to credit risk in Basel II. The minimum capital requirements for the corporate, interbank and sovereign loan portfolios of a representative bank in each EMU country are evaluated by means of Monte-Carlo simulations depending on the credit rating agencies chosen by the bank to risk-weight its exposures. Three main results emerge from the analysis. First, although the use of different combinations of credit rating agencies leads to significant differences in minimum capital requirements, these differences never exceed 10% of banks’ regulatory capital for loans to corporates, banks and sovereigns on average in the EMU. Second, the standardised approach provides a small regulatory capital incentive for banks to use several credit rating agencies to risk-weight their exposures. Third, the minimum capital requirements for the corporate, interbank and sovereign loan portfolios of EMU banks will be higher in Basel II than in Basel I. I also show that the incentive for banks to engage in regulatory arbitrage in the standardised approach to credit risk is limited.
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.:
- Richard Cantor & Frank Packer, 1995. "Sovereign credit ratings," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 1(Jun).
- Christian Upper & Andreas Worms, 2001.
"Estimating bilateral exposures in the German interbank market: is there a danger of contagion?,"
BIS Papers chapters,
in: Bank for International Settlements (ed.), Marrying the macro- and micro-prudential dimensions of financial stability, volume 1, pages 211-229
Bank for International Settlements.
- Upper, Christian & Worms, Andreas, 2004. "Estimating bilateral exposures in the German interbank market: Is there a danger of contagion?," European Economic Review, Elsevier, vol. 48(4), pages 827-849, August.
- Upper, Christian & Worms, Andreas, 2002. "Estimating Bilateral Exposures in the German Interbank Market: Is there a Danger of Contagion?," Discussion Paper Series 1: Economic Studies 2002,09, Deutsche Bundesbank, Research Centre.
- Santos, Joao A.C., 2006. "Why firm access to the bond market differs over the business cycle: A theory and some evidence," Journal of Banking & Finance, Elsevier, vol. 30(10), pages 2715-2736, October.
- Altman, Edward I. & Saunders, Anthony, 2001. "An analysis and critique of the BIS proposal on capital adequacy and ratings," Journal of Banking & Finance, Elsevier, vol. 25(1), pages 25-46, January.
- Cantor, Richard & Packer, Frank, 1997. "Differences of opinion and selection bias in the credit rating industry," Journal of Banking & Finance, Elsevier, vol. 21(10), pages 1395-1417, October.
- Jacobson, Tor & Linde, Jesper & Roszbach, Kasper, 2006.
"Internal ratings systems, implied credit risk and the consistency of banks' risk classification policies,"
Journal of Banking & Finance,
Elsevier, vol. 30(7), pages 1899-1926, July.
- Jacobson, Tor & Lindé, Jesper & Roszbach, Kasper, 2003. "Internal Ratings Systems, Implied Credit Risk and the Consistency of Banks’ Risk Classification Policies," Working Paper Series 155, Sveriges Riksbank (Central Bank of Sweden).
- Ongena, Steven & Smith, David C., 2000. "What Determines the Number of Bank Relationships? Cross-Country Evidence," Journal of Financial Intermediation, Elsevier, vol. 9(1), pages 26-56, January.
- Sironi, Andrea, 2003.
" Testing for Market Discipline in the European Banking Industry: Evidence from Subordinated Debt Issues,"
Journal of Money, Credit and Banking,
Blackwell Publishing, vol. 35(3), pages 443-72, June.
- Andrea Sironi, 2000. "Testing for market discipline in the European banking industry: evidence from subordinated debt issues," Finance and Economics Discussion Series 2000-40, Board of Governors of the Federal Reserve System (U.S.).
- C. H. Furfine & Jeffery D. Amato, 2003. "Are credit ratings procyclical?," BIS Working Papers 129, Bank for International Settlements.
- Mark Carey, 1998. "Credit Risk in Private Debt Portfolios," Journal of Finance, American Finance Association, vol. 53(4), pages 1363-1387, 08.
- Altman, Edward I. & Bharath, Sreedhar T. & Saunders, Anthony, 2002. "Credit ratings and the BIS capital adequacy reform agenda," Journal of Banking & Finance, Elsevier, vol. 26(5), pages 909-921, May.
- Alexis Derviz & Narcisa Kadlcakova & Lucie Kobzova, 2003. "Credit Risk, Systemic Uncertainties and Economic Capital Requirements for an Artificial Bank Loan Portfolio," Working Papers 2003/09, Czech National Bank, Research Department.
- Donald P. Morgan, 2002. "Rating Banks: Risk and Uncertainty in an Opaque Industry," American Economic Review, American Economic Association, vol. 92(4), pages 874-888, September.
- Ferri, Giovanni & Liu, Li-Gang & Majnoni, Giovanni, 2001. "The role of rating agency assessments in less developed countries: Impact of the proposed Basel guidelines," Journal of Banking & Finance, Elsevier, vol. 25(1), pages 115-148, January.
When requesting a correction, please mention this item's handle: RePEc:wpa:wuwpfi:0509014. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (EconWPA)
If references are entirely missing, you can add them using this form.