Using Credit Ratings for Capital Requirementson Lending to Emerging Market Economies: Possible Impact of a New Basel Accord

Christian Mulder () and Brieuc Monfort

No 2000/069, IMF Working Papers from International Monetary Fund

Abstract: The Basel Committee on Banking Supervision has proposed linking capital requirements for bank loans to ratings by commercial credit rating agencies. Estimates for 20 emerging market economies show that sovereign ratings react procyclically to crisis indicators. Ratings deteriorate if the real effective exchange rate depreciates, in contrast with the positive effect on overall debt service capacity depreciations are normally supposed to have. Simulations show that linking capital requirements to ratings would have drastically increased these requirements during the crisis periods after decreasing them in the run up to the crises. Simulations suggest modest efficiency gains of using sovereign credit ratings for capital requirements on emerging market lending.

Keywords: WP; rating agency; capital requirement; transfer risk rating; rating behavior; Rating agencies; capital requirements; economic crises; emerging markets; rating model; shadow rating; sovereign rating; Emerging and frontier financial markets; Loans; Basel Core Principles; Real effective exchange rates; Bank credit; Africa; Asia and Pacific (search for similar items in EconPapers)
Pages: 45
Date: 2000-03-01
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Citations: View citations in EconPapers (71)

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