Procyclicality and the new Basel Accord - banks’ choice of loan rating system

Eva Catarineu-Rabell, Patricia Jackson and Dimitrios Tsomocos

Economic Theory, 2005, vol. 26, issue 3, 537-557

Abstract: The Basel Committee on Banking Supervision is proposing to introduce, in 2006, new risk-based requirements for internationally active (and other significant) banks. These will replace the relatively risk-invariant requirements in the current Accord. The new requirements for the largest bank will be based on bank ratings of the probability of default of the borrowers. There is evidence that the choice of loan ratings which are conditional on the point in the economic cycle could lead to sharp increases in capital requirements in recessions. This makes the question of which rating schemes banks will use very important. The paper uses a general equilibrium model of the financial system to explore whether banks would choose to use a countercyclical, procyclical or neutral rating scheme. The results indicate that banks would not choose a stable rating approach, which has important policy implications for the design of the Accord. It makes it important that banks are given incentives to adopt more stable rating schemes. This consideration has been reflected in the Committee’s latest proposals, in October 2002. Copyright Springer-Verlag Berlin/Heidelberg 2005

Keywords: Basel Accord; Bank rating; Endogenous default; Procyclicality; Risk weights. (search for similar items in EconPapers)
Date: 2005
References: Add references at CitEc
Citations: View citations in EconPapers (80)

Downloads: (external link)
http://hdl.handle.net/10.1007/s00199-004-0534-0 (text/html)
Access to full text is restricted to subscribers.

Related works:
Working Paper: Procyclicality and the new Basel Accord - banks' choice of loan rating system (2003)
Working Paper: Procyclicality and the new Basel Accord–banks’ choice of loan rating system (2003)
Working Paper: Procyclicality and the new Basel Accord–banks’ choice of loan rating system (2003)
Working Paper: Procyclicality and the new Basel Accord - Banks` choice of loan rating system (2003)
Working Paper: Procyclicality and the new Basel Accord - Banks' choice of loan rating system (2003)
Journal Article: Procyclicality and the New Basel Accord: banks' choice of loan rating system (2002)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:joecth:v:26:y:2005:i:3:p:537-557

Ordering information: This journal article can be ordered from
http://www.springer. ... eory/journal/199/PS2

DOI: 10.1007/s00199-004-0534-0

Access Statistics for this article

Economic Theory is currently edited by Nichoals Yanneils

More articles in Economic Theory from Springer, Society for the Advancement of Economic Theory (SAET) Contact information at EDIRC.
Bibliographic data for series maintained by Sonal Shukla (sonal.shukla@springer.com) and Springer Nature Abstracting and Indexing (indexing@springernature.com).