Using Credit Ratings for Capital Requirementson Lending to Emerging Market Economies: Possible Impact of a New Basel Accord
IMF Working Papers, March 1, 2000
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- Using Credit Ratings for Capital Requirementson Lending to Emerging Market Economies: Possible Impact of a New Basel Accord
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Bibliographic details
- Authors: Christian B. Mulder, Brieuc Monfort
- Published: March 1, 2000
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451849059.001
Summary
- 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.
Key findings and empirical results
- Sovereign ratings for a sample of 20 emerging market economies display procyclical behavior relative to crisis indicators.
- Real effective exchange rate depreciations are associated with rating deterioration, contrary to the usual positive effect of depreciations on overall debt service capacity.
Simulation results
- Linking capital requirements to sovereign ratings:
- Would have drastically increased capital requirements during crisis periods.
- Would have decreased capital requirements in the run up to crises.
- Overall simulations indicate modest efficiency gains from using sovereign credit ratings for capital requirements on emerging market lending.
Subject coverage and keywords
- Subjects: Bank credit; Banking; Basel Core Principles; Emerging and frontier financial markets; Financial institutions; Financial markets; Financial regulation and supervision; Foreign exchange; Loans; Money; Real effective exchange rates.
- Keywords: Africa; Asia and Pacific; Bank credit; Basel Core Principles; capital requirement; capital requirements; economic crises; Emerging and frontier financial markets; emerging markets; Loans; Rating agencies; rating agency; rating behavior; rating model; Real effective exchange rates; shadow rating; sovereign rating; transfer risk rating; WP.