Using Credit Ratings for Capital Requirementson Lending to Emerging Market Economies

Using Credit Ratings for Capital Requirementson Lending to Emerging Market Economies

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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.REFERENCES Basel Committee on Banking Supervision, a€œA new Capital Adequacy Framework, a€ Consultative paper, Basel, June 1999. ... Liquidity, a€ IMF Working Paper WP/99/88, 1999 Cantor, Richard and Packer, Frank, a€œ Determinants and Impacts of Sovereign Credit Ratings, a€ Federal Reserve ... IIF Research Papers, n.


Title:Using Credit Ratings for Capital Requirementson Lending to Emerging Market Economies
Author: Mr. Christian B. Mulder, Brieuc Monfort
Publisher:International Monetary Fund - 2000-03-01
ISBN-13:

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