A critique on the proposed use of external sovereign credit ratings in Basel II

  • This paper deals with the proposed use of sovereign credit ratings in the "Basel Accord on Capital Adequacy" (Basel II) and considers its potential effect on emerging markets financing. It investigates in a first attempt the consequences of the planned revisions on the two central aspects of international bank credit flows: the impact on capital costs and the volatility of credit supply across the risk spectrum of borrowers. The empirical findings cast doubt on the usefulness of credit ratings in determining commercial banks' capital adequacy ratios since the standardized approach to credit risk would lead to more divergence rather than convergence between investment-grade and speculative-grade borrowers. This conclusion is based on the lateness and cyclical determination of credit rating agencies' sovereign risk assessments and the continuing incentives for short-term rather than long-term interbank lending ingrained in the proposed Basel II framework.

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Author:Roman KräusslORCiDGND
Parent Title (German):Center for Financial Studies (Frankfurt am Main): CFS working paper series ; No. 2003,23
Series (Serial Number):CFS working paper series (2003, 23)
Document Type:Working Paper
Year of Completion:2003
Year of first Publication:2003
Publishing Institution:Universitätsbibliothek Johann Christian Senckenberg
Release Date:2005/06/13
Tag:Basel II; Credit Ratings; Sovereign Risk
GND Keyword:Schwellenländer; Länderrating; Länderrisiko; Standardisierung; Zertifizierung; Emerging Market; Kritik; Eigenkapitalgrundsätze; Basler Eigenkapitalvereinbarung, 2001; Basler Eigenkapitalvereinbarung, 2010; Basler Eigenkapitalvereinbarung <1988>; Börsenkrach; Finanzkrise
Issue:Version August 2003
Institutes:Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS)
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
Licence (German):License LogoDeutsches Urheberrecht