Rating systems,procyclicality and Basel II: an evaluation in a general equilibrium framework |
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Authors: | Chiara Pederzoli Costanza Torricelli Dimitrios P Tsomocos |
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Institution: | 1.University of Milano-Bicocca and CEFIN,Milan,Italy;2.University of Modena and Reggio Emilia and CEFIN,Modena,Italy;3.St. Edmund Hall and Sa?d Business School, University of Oxford,Oxford,UK |
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Abstract: | The introduction of Basel II has raised concerns about the potential impact of risk-sensitive capital requirements on the
business cycle. Several approaches have been proposed to assess the procyclicality issue. In this paper, we adopt a general
equilibrium model and conduct comprehensive analysis of different proposals. We set out a model that allows to evaluate different
rating systems in relation to the procyclicality issue. Our model extends previous models by analysing the effects of different
rating systems on banks’ portfolios (as in Catarineu et al. in Econ Theory 26:537–557, 2005) and the contagion effects relevant
to financial stability (as in Goodhart et al. in Ann Finance 1:197–224, 2005). The paper presents comparative statics results
comparing a cycle-dependent and a neutral rating system from the point of view of banks profit maximization. Our results suggest
that banks’ preferences about point in time or through the cycle rating systems depend on the banks’ characteristics and on the business cycle conditions in terms of expectations and realizations. |
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