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Rating systems, procyclicality and Basel II: an evaluation in a general equilibrium framework

Chiara Pederzoli (), Costanza Torricelli and Dimitrios Tsomocos

OFRC Working Papers Series from Oxford Financial Research Centre

Abstract: The introduction of Basel II has raised concerns about the potential impact of risk-sensitive capital requirements on the business cycle. Several approaches have been proposed to assess the procyclicality issue. In this paper, we adopt a general equilibrium model and conduct comprehensive analysis of different proposals. We set out a model that allows to evaluate different rating systems in relation to the procyclicality issue. Our model extends previous models by analysing the effects of different rating systems on banks’ portfolios (as in Catarineu-Rabell et al. 2005) and the contagion effects relevant to financial stability (as in Goodhart et al. 2005). The paper presents comparative statics results comparing a cycle-dependent and a neutral rating system from the point of view of banks profit maximization. Our results suggest that banks’ preferences about point in time or through the cycle rating systems depend on the banks’ characteristics and on the business cycle conditions in terms of expectations and realizations.

Pages: 21
Date: 2008
New Economics Papers: this item is included in nep-ban, nep-bec and nep-rmg
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Citations: View citations in EconPapers (4)

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Related works:
Journal Article: Rating systems, procyclicality and Basel II: an evaluation in a general equilibrium framework (2010) Downloads
Working Paper: Rating systems, procyclicalilty and Basel II: an evaluation in a general equilibrium framework (2008)
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