A Critique on the Proposed Use of External Sovereign Credit Ratings in Basel II

Roman Kraeussl
Authors registered in the RePEc Author Service: Roman Kräussl

No 2003/23, CFS Working Paper Series from Center for Financial Studies (CFS)

Abstract: This paper deals with the proposed use of sovereign credit ratings in the Basel Accord on Capital Adequacy (Basel II) and considers its potential effect on emerging markets financ-ing. It investigates in a first attempt the consequences of the planned revisions on the two central aspects of international bank credit flows: the impact on capital costs and the volatility of credit supply across the risk spectrum of borrowers. The empirical findings cast doubt on the usefulness of credit ratings in determining commercial banks' capital adequacy ratios since the standardized approach to credit risk would lead to more divergence rather than conver-gence between investment-grade and speculative-grade borrowers. This conclusion is based on the lateness and cyclical determination of credit rating agencies' sovereign risk assess-ments and the continuing incentives for short-term rather than long-term interbank lending ingrained in the proposed Basel II framework.

Keywords: Sovereign Risk; Credit Ratings; Basel II (search for similar items in EconPapers)
JEL-codes: E44 E47 G15 (search for similar items in EconPapers)
Date: 2003
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Working Paper: A Critique on the Proposed Use of External Sovereign Credit Ratings in Basel II
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:cfswop:200323

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