Perverse Effects of an External Ratings-Related Capital Adequacy System

Patrick Honohan

Economic Notes, 2001, vol. 30, issue 3, 359-372

Abstract: type="main" xml:lang="en">

It has recently been proposed that banks should be allowed to hold less capital against loans to borrowers who have received a favourable rating by an approved external credit assessment institution (ECAI), or rating agency. But a plausible model of rating agency behaviour shows that this strategy could have perverse results, actually increasing the risk of deposit insurance outlays. First, there is an issue of signalling, whereby low-ability borrowers may alter their behaviour so as to secure a lower capital requirement for their borrowing. Second, the establishment of a regulatory cut-off may actually reduce the amount of risk information made available by raters. Besides, the credibility of rating agencies may not be damaged by neglect of the risk of unusual systemic shocks, though it is these that cause the major bank failure costs.

(J.E.L.:E53, G21, G33)

Date: 2001
References: Add references at CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://hdl.handle.net/10.1111/1468-0300.00063 (text/html)
Access to full text is restricted to subscribers.

Related works:
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:bla:ecnote:v:30:y:2001:i:3:p:359-372

Ordering information: This journal article can be ordered from
http://www.blackwell ... bs.asp?ref=0391-5026

Access Statistics for this article

More articles in Economic Notes from Banca Monte dei Paschi di Siena SpA
Bibliographic data for series maintained by Wiley Content Delivery ().