A Critique on the Proposed Use of External Sovereign Credit Ratings in Basel II

Roman Kraeussl
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Roman Kraeussl: Center for Financial Studies, Frankfurt am Main, Germany
Authors registered in the RePEc Author Service: Roman Kräussl

No 315, Working Papers from University of Crete, Department of Economics

Abstract: 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 financing. 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 convergence between investment-grade and speculative-grade borrowers. This conclusion is based on the lateness and cyclical determination of credit rating agencies’ sovereign risk assessments and the continuing incentives for short-term rather than long-term interbank lending ingrained in the proposed Basel II framework.

Keywords: Sovereign Risk; Credit Ratings; Basel II (search for similar items in EconPapers)
JEL-codes: E44 E47 G15 (search for similar items in EconPapers)
Pages: 39 pages
New Economics Papers: this item is included in nep-ban, nep-cfn, nep-mac and nep-rmg
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Working Paper: A Critique on the Proposed Use of External Sovereign Credit Ratings in Basel II (2003)
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Persistent link: https://EconPapers.repec.org/RePEc:crt:wpaper:0315

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