The role of banking portfolios in the transmission from currency crises to banking crises - potential effects of Basel II

Tobias Knedlik and Johannes Ströbel
Authors registered in the RePEc Author Service: Johannes Stroebel

No 21/2006, IWH Discussion Papers from Halle Institute for Economic Research (IWH)

Abstract: This paper evaluates the potential effects of the Basel II accord on preventing the transmission from currency crises to financial crises. By analyzing the case study of South Korea, it shows how mismatches on banks’ balance sheets were the primary cause for such a transmission, and models how Basel II would have affected those balance sheets. The paper shows that due to South Korea’s positive credit rating in the months leading up to the crisis, the regulatory capital reserves under Basel II would have been even lower than those under Basel I, and that therefore Basel II would have had adverse effects on the development of the crisis. In the second part, the article analyses whether the behavior of rating agencies has changed since their failure to predict the Asian crisis. The paper finds no robust econometric evidence that rating agencies have started to take micromismatches into account when assigning sovereign ratings. Thus, given the current approach of credit rating agencies, we have reservations concerning the effectiveness of Basel II to prevent the transmission from currency crises to banking crises, both for the case of South Korea and for potential future crises.

Keywords: Asienkrise; Bankenbilanzen; Währungs-Mismatch; Laufzeit-Mismatch; Basel II; Kreditratings; Asian Financial Crisis; Bank Portfolios; Currency Mismatch; Maturity Mismatch; Basel II; Credit Ratings (search for similar items in EconPapers)
JEL-codes: F3 F40 G15 G28 (search for similar items in EconPapers)
Date: 2006
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:iwhdps:iwh-21-06

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