The real impact of ratings-based capital rules on the finance-growth nexus

Iftekhar Hasan, Gazi Hassan (), Suk-Joong Kim () and Eliza Wu

International Review of Financial Analysis, 2021, vol. 73, issue C

Abstract: We investigate whether ratings-based capital regulation has affected the finance-growth nexus via a foreign credit channel. Using quarterly data on short to medium term real GDP growth and cross-border bank lending flows from G-10 countries to 67 recipient countries, we find that since the implementation of Basel 2 capital rules, risk weight reductions mapped to sovereign credit rating upgrades have stimulated short-term economic growth in investment grade recipients but hampered growth in non-investment grade recipients. The impact of these rating upgrades is strongest in the first year and then reverses from the third year and onwards. On the other hand, there is a consistent and lasting negative impact of risk weight increases due to rating downgrades across all recipient countries. The adverse effects of ratings-based capital regulation on foreign bank credit supply and economic growth are compounded in countries with more corruption and less competitive banking sectors and are attenuated with greater political stability.

Keywords: Finance-growth nexus; Cross-border banking; Sovereign credit ratings; Basel 2; Ratings-based capital regulation; Capital requirements (search for similar items in EconPapers)
JEL-codes: E44 F34 G21 H63 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:73:y:2021:i:c:s1057521920302714

DOI: 10.1016/j.irfa.2020.101628

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