Research Discussion Papers, Bank of Finland
No 27/2006:
Rating targeting and the confidence levels implicit in bank capital
Esa Jokivuolle ()
and Samu Peura
Abstract: The solvency standards implicit in bank capital levels, as
reported eg in Jackson et al (2002), are much higher than those required
for top ratings, if standard single period economic capital models are
taken se-riously. We explain this excess capital puzzle by forward looking
rating targeting behaviour by banks, which aims at maintaining rating above
a minimum target in future periods. We calibrate to data on actual bank
capital the confidence level used by the median US AA rated bank to
maintain at least a single A rating. The calibrated confidence level is in
line with the historical probability of an AA rated bank to be downgraded
below A.
Keywords: bank capital; credit rating; value-at-risk; economic capital; capital structure; (follow links to similar papers)
JEL-Codes: G21; G32; (follow links to similar papers)
27 pages, December 10, 2006
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