Using Credit Ratings for Capital Requirementson Lending to Emerging Market Economies: Possible Impact of a New Basel Accord

March 1, 2000

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

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.

Subject: 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

Pages:
45
Volume:
2000
DOI:
https://doi.org/10.5089/9781451849059.001
Issue:
069
Series:
Working Paper No. 2000/069
Stock No:
WPIEA0692000
ISBN:
9781451849059
ISSN:
1018-5941

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