Regulatory reform and risk-taking: replacing ratings

Bo Becker and Marcus Opp

No 19257, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We analyze a reform of insurance companies' capital requirements for mortgage-backed securities. First, credit ratings were replaced as inputs to capital regulation. Second, the redesigned system ensures capital buffers sufficient to withstand expected losses, but insufficient to protect against adverse outcomes. Many bonds are now treated as riskless and require minimal capital. By 2012, aggregate capital requirements for mortgage-backed securities have been reduced from $19.36bn (had the previous system been maintained) to $3.73bn. Exploiting that the change did not affect other asset classes, we document that insurers' risk taking was distorted and increased in response to the new regulation.

JEL-codes: G22 G24 G28 (search for similar items in EconPapers)
Date: 2013-07
New Economics Papers: this item is included in nep-ban and nep-rmg
Note: CF
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Citations: View citations in EconPapers (13)

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