A Critique on the Proposed Use of External Sovereign Credit Ratings in Basel II
This paper deals with the proposed use of sovereign credit ratings in the Basel Accord on Capital Adequacy (Basel II) and considers its potential effect on emerging markets financ-ing. It investigates in a first attempt the consequences of the planned revisions on the two central aspects of international bank credit flows: the impact on capital costs and the volatility of credit supply across the risk spectrum of borrowers. The empirical findings cast doubt on the usefulness of credit ratings in determining commercial banks' capital adequacy ratios since the standardized approach to credit risk would lead to more divergence rather than conver-gence between investment-grade and speculative-grade borrowers. This conclusion is based on the lateness and cyclical determination of credit rating agencies' sovereign risk assess-ments and the continuing incentives for short-term rather than long-term interbank lending ingrained in the proposed Basel II framework.
|Date of creation:||2003|
|Contact details of provider:|| Postal: House of Finance, Grüneburgplatz 1, HPF H5, D-60323 Frankfurt am Main|
Phone: +49 (0)69 798-30050
Fax: +49 (0)69 798-30077
Web page: http://www.ifk-cfs.de/
More information through EDIRC
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.:
- Arturo Estrella & Sangkyun Park & Stavros Peristiani, 2000. "Capital ratios as predictors of bank failure," Economic Policy Review, Federal Reserve Bank of New York, issue Jul, pages 33-52.
- Cem Karacadag & Michael W. Taylor, 2000.
"The New Capital Adequacy Framework - Institutional Constraints and Incentive Structures,"
SUERF - The European Money and Finance Forum, number 8 edited by Morten Balling, April.
- Cem Karacadag & Michael W. Taylor, 2000. "The New Capital Adequacy Framework: Institutional Constraints and Incentive Structures," Chapters in SUERF Studies, SUERF - The European Money and Finance Forum.
- Diamond, Douglas W & Dybvig, Philip H, 1986. "Banking Theory, Deposit Insurance, and Bank Regulation," The Journal of Business, University of Chicago Press, vol. 59(1), pages 55-68, January.
- Barry Eichengreen & Ashoka Mody, 2000.
"Would Collective Action Clauses Raise Borrowing Costs?,"
NBER Working Papers
7458, National Bureau of Economic Research, Inc.
- Eichengreen, Barry & Mody, Ashoka, 1999. "Would Collective Action Clauses Raise Borrowing Costs?," CEPR Discussion Papers 2343, C.E.P.R. Discussion Papers.
- de Bandt, Olivier & Hartmann, Philipp, 2000.
"Systemic Risk: A Survey,"
CEPR Discussion Papers
2634, C.E.P.R. Discussion Papers.
- Cantor, Richard, 2001. "Moody's investors service response to the consultative paper issued by the Basel Committee on Bank Supervision "A new capital adequacy framework"," Journal of Banking & Finance, Elsevier, vol. 25(1), pages 171-185, January.
- Dowd, Kevin, 1996. "The Case for Financial Laissez-Faire," Economic Journal, Royal Economic Society, vol. 106(436), pages 679-687, May.
- Jones, David, 2000. "Emerging problems with the Basel Capital Accord: Regulatory capital arbitrage and related issues," Journal of Banking & Finance, Elsevier, vol. 24(1-2), pages 35-58, January.
- Matutes, Carmen & Vives, Xavier, 1995.
"Imperfect Competition, Risk Taking, and Regulation in Banking,"
CEPR Discussion Papers
1177, C.E.P.R. Discussion Papers.
- Matutes, Carmen & Vives, Xavier, 2000. "Imperfect competition, risk taking, and regulation in banking," European Economic Review, Elsevier, vol. 44(1), pages 1-34, January.
- Diamond, Douglas W & Dybvig, Philip H, 1983.
"Bank Runs, Deposit Insurance, and Liquidity,"
Journal of Political Economy,
University of Chicago Press, vol. 91(3), pages 401-419, June.
- Reisen, Helmut & von Maltzan, Julia, 1999.
"Boom and Bust and Sovereign Ratings,"
Wiley Blackwell, vol. 2(2), pages 273-293, July.
- Benston, George J & Kaufman, George G, 1996. "The Appropriate Role of Bank Regulation," Economic Journal, Royal Economic Society, vol. 106(436), pages 688-697, May.
- Treacy, William F. & Carey, Mark, 2000. "Credit risk rating systems at large US banks," Journal of Banking & Finance, Elsevier, vol. 24(1-2), pages 167-201, January.
- 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.
- Kenneth Rogoff, 1999.
"International Institutions for Reducing Global Financial Instability,"
NBER Working Papers
7265, National Bureau of Economic Research, Inc.
- Kenneth Rogoff, 1999. "International Institutions for Reducing Global Financial Instability," Journal of Economic Perspectives, American Economic Association, vol. 13(4), pages 21-42, Fall.
- Christian B. Mulder & Brieuc Monfort, 2000. "Using Credit Ratings for Capital Requirementson Lending to Emerging Market Economies; Possible Impact of a New Basel Accord," IMF Working Papers 00/69, International Monetary Fund.
- Mark S. Carey, 2002. "A guide to choosing absolute bank capital requirements," International Finance Discussion Papers 726, Board of Governors of the Federal Reserve System (U.S.).
- 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.
- J. Bradford DeLong & Barry Eichengreen, 2001. "Between Meltdown and Moral Hazard: The International Monetary and Financial Policies of the Clinton Administration," NBER Working Papers 8443, National Bureau of Economic Research, Inc.
- Beatrice Weder & Michael Wedow, 2002. "Will Basel II Affect International Capital Flows to Emerging Markets?," OECD Development Centre Working Papers 199, OECD Publishing.
- Carey, Mark, 2002. "A guide to choosing absolute bank capital requirements," Journal of Banking & Finance, Elsevier, vol. 26(5), pages 929-951, May.
- Merton, Robert C., 1977. "An analytic derivation of the cost of deposit insurance and loan guarantees An application of modern option pricing theory," Journal of Banking & Finance, Elsevier, vol. 1(1), pages 3-11, June.
When requesting a correction, please mention this item's handle: RePEc:zbw:cfswop:200323. 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: (ZBW - German National Library of Economics)
If references are entirely missing, you can add them using this form.