Procyclicality and Regulatory Arbitrage through Optimized Internal Rating Systems

Arbitrage réglementaire et implications procycliques des choix en matière de systèmes de notation interne

Abdikarim Fouad Ali and Adrian Pop ()
Additional contact information
Adrian Pop: Faculté de Droit, Economie et Gestion de l’université d’Angers., GRANEM - Groupe de Recherche Angevin en Economie et Management - UA - Université d'Angers - Institut Agro Rennes Angers - Institut Agro - Institut national d'enseignement supérieur pour l'agriculture, l'alimentation et l'environnement

Post-Print from HAL

Abstract: The aim of this article is to assess the procyclical implications of the various approaches and rating philosophies used to compute minimum capital requirements while taking into account the regulatory arbitrage-seeking behavior of banks. Regulatory arbitrage is modeled through the bank's incentive to optimize its internal rating system in order to lower as much as possible the capital charge given the structure of its loan portfolio in terms of default probabilities. Our counterfactual analysis reveals that regulatory arbitrage is effective in lowering the minimum capital charge under the Internal Rating-Based (IRB) approach, but it also increases its volatility and, potentially, exacerbates the procyclicality of risk-adjusted solvency regulations.

Date: 2024-11-29
References: Add references at CitEc
Citations:

Published in Revue Economique, 2024, Vol. 75 (4), pp.607-639. ⟨10.3917/reco.754.0607⟩

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

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:hal:journl:hal-04900994

DOI: 10.3917/reco.754.0607

Access Statistics for this paper

More papers in Post-Print from HAL
Bibliographic data for series maintained by CCSD ().