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

Eva Catarineu-Rabell, Patricia Jackson and Dimitrios Tsomocos

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

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. This article examines the implications of this new risk-based regime for procyclicality of minimum capital requirements – in particular whether the choice of particular loan rating system by the banks would significantly increase the likelihood of sharp increases in capital requirements in recessions, creating the potential for classic credit crunches. The paper finds that rating schemes that are designed to be more stable over the cycle, akin to those of the external rating agencies, would not increase procyclicality, but ratings that are conditioned on the current point in the cycle, akin in some respects to a Merton approach, could substantially increase procyclicality. 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.

JEL-codes: G21 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2003-08
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (39)

Downloads: (external link)
http://eprints.lse.ac.uk/24863/ Open access version. (application/pdf)

Related works:
Journal Article: Procyclicality and the new Basel Accord - banks’ choice of loan rating system (2005)
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:ehl:lserod:24863

Access Statistics for this paper

More papers in LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library LSE Library Portugal Street London, WC2A 2HD, U.K.. Contact information at EDIRC.
Bibliographic data for series maintained by LSERO Manager ().