Perverse Effects of a Ratings-Related Capital Adequacy System:
June 2000 - Allowing banks to hold less capital against loans to borrowers who have received a favorable rating by an approved rating agency may result in a rating system that neither reveals risk information about borrowers nor protects the deposit insurance fund. Part of the problem is the very id...
Gespeichert in:
| 1. Verfasser: | |
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| Format: | Elektronisch E-Book |
| Sprache: | English |
| Veröffentlicht: |
Washington, D.C
The World Bank
1999
|
| Schlagworte: | |
| Online-Zugang: | BSB01 EUV01 HTW01 FHI01 IOS01 Volltext |
| Zusammenfassung: | June 2000 - Allowing banks to hold less capital against loans to borrowers who have received a favorable rating by an approved rating agency may result in a rating system that neither reveals risk information about borrowers nor protects the deposit insurance fund. Part of the problem is the very idea of basing portfolio risk evaluation on the sum of individual loan risks, but there are also important incentive issues. It has recently been proposed that banks be allowed to hold less capital against loans to borrowers who have received a favorable rating by an approved rating agency. But a plausible model of rating-agency behavior shows that this strategy could have perverse results, actually increasing the risk of deposit insurance outlays. First, there is an issue of signaling, with low-ability borrowers possibly altering their behavior to secure a lower capital requirement for their borrowing. Second, establishing a regulatory cut-off may actually reduce the amount of risk information made available by raters. Besides, the credibility of rating agencies may not be damaged by neglect of the risk of unusual systemic shocks, although deposit insurers greatest outlays come chiefly at times of systemic crisis. And using agencies' individual ratings is unlikely to be an effective early-warning system for the risk of systemic failure, so use of the ratings could lull policymakers into a false sense of security. It is important to harness market information to improve bank safety (for example, by increasing the role of large, well-informed, but uninsured claimants), but this particular approach could be counterproductive. Relying on ratings could induce borrowers to increase their exposure to systemic risk even if they reduce exposure to specific risk. This paper - a product of Finance, Development Research Group - is part of a larger effort in the group to examine the effects of financial sector regulation. The author may be contacted at phonohan@worldbank.org |
| Beschreibung: | 1 Online-Ressource (20 Seiten)) |
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Datensatz im Suchindex
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| author | Honohan, Patrick |
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| spelling | Honohan, Patrick Verfasser aut Perverse Effects of a Ratings-Related Capital Adequacy System Honohan, Patrick Washington, D.C The World Bank 1999 1 Online-Ressource (20 Seiten)) txt rdacontent c rdamedia cr rdacarrier June 2000 - Allowing banks to hold less capital against loans to borrowers who have received a favorable rating by an approved rating agency may result in a rating system that neither reveals risk information about borrowers nor protects the deposit insurance fund. Part of the problem is the very idea of basing portfolio risk evaluation on the sum of individual loan risks, but there are also important incentive issues. It has recently been proposed that banks be allowed to hold less capital against loans to borrowers who have received a favorable rating by an approved rating agency. But a plausible model of rating-agency behavior shows that this strategy could have perverse results, actually increasing the risk of deposit insurance outlays. First, there is an issue of signaling, with low-ability borrowers possibly altering their behavior to secure a lower capital requirement for their borrowing. Second, establishing a regulatory cut-off may actually reduce the amount of risk information made available by raters. Besides, the credibility of rating agencies may not be damaged by neglect of the risk of unusual systemic shocks, although deposit insurers greatest outlays come chiefly at times of systemic crisis. And using agencies' individual ratings is unlikely to be an effective early-warning system for the risk of systemic failure, so use of the ratings could lull policymakers into a false sense of security. It is important to harness market information to improve bank safety (for example, by increasing the role of large, well-informed, but uninsured claimants), but this particular approach could be counterproductive. Relying on ratings could induce borrowers to increase their exposure to systemic risk even if they reduce exposure to specific risk. This paper - a product of Finance, Development Research Group - is part of a larger effort in the group to examine the effects of financial sector regulation. The author may be contacted at phonohan@worldbank.org Online-Ausg Bank Bank Failure Bank Failures Banking Supervision Banks Banks and Banking Reform Capital Capital Adequacy Capital Requirement Capital Requirements Debt Debt Markets Deposit Insurance Deposits Emerging Markets Finance and Financial Sector Development Financial Literacy Interest Lending Loans Private Sector Development Projects Rating Agencies Risk Risk Factors Systemic Risk Honohan, Patrick Sonstige oth Honohan, Patrick Perverse Effects of a Ratings-Related Capital Adequacy System http://elibrary.worldbank.org/content/workingpaper/10.1596/1813-9450-2364 Verlag URL des Erstveröffentlichers Volltext |
| spellingShingle | Honohan, Patrick Perverse Effects of a Ratings-Related Capital Adequacy System Bank Bank Failure Bank Failures Banking Supervision Banks Banks and Banking Reform Capital Capital Adequacy Capital Requirement Capital Requirements Debt Debt Markets Deposit Insurance Deposits Emerging Markets Finance and Financial Sector Development Financial Literacy Interest Lending Loans Private Sector Development Projects Rating Agencies Risk Risk Factors Systemic Risk |
| title | Perverse Effects of a Ratings-Related Capital Adequacy System |
| title_auth | Perverse Effects of a Ratings-Related Capital Adequacy System |
| title_exact_search | Perverse Effects of a Ratings-Related Capital Adequacy System |
| title_exact_search_txtP | Perverse Effects of a Ratings-Related Capital Adequacy System |
| title_full | Perverse Effects of a Ratings-Related Capital Adequacy System Honohan, Patrick |
| title_fullStr | Perverse Effects of a Ratings-Related Capital Adequacy System Honohan, Patrick |
| title_full_unstemmed | Perverse Effects of a Ratings-Related Capital Adequacy System Honohan, Patrick |
| title_short | Perverse Effects of a Ratings-Related Capital Adequacy System |
| title_sort | perverse effects of a ratings related capital adequacy system |
| topic | Bank Bank Failure Bank Failures Banking Supervision Banks Banks and Banking Reform Capital Capital Adequacy Capital Requirement Capital Requirements Debt Debt Markets Deposit Insurance Deposits Emerging Markets Finance and Financial Sector Development Financial Literacy Interest Lending Loans Private Sector Development Projects Rating Agencies Risk Risk Factors Systemic Risk |
| topic_facet | Bank Bank Failure Bank Failures Banking Supervision Banks Banks and Banking Reform Capital Capital Adequacy Capital Requirement Capital Requirements Debt Debt Markets Deposit Insurance Deposits Emerging Markets Finance and Financial Sector Development Financial Literacy Interest Lending Loans Private Sector Development Projects Rating Agencies Risk Risk Factors Systemic Risk |
| url | http://elibrary.worldbank.org/content/workingpaper/10.1596/1813-9450-2364 |
| work_keys_str_mv | AT honohanpatrick perverseeffectsofaratingsrelatedcapitaladequacysystem |