Research Discussion Papers, Bank of Finland
The effects of ratings-contingent regulation on international bank lending behavior: Evidence from the Basel 2 accord
(), Suk-Joong Kim
() and Eliza Wu
Abstract: We investigate the effects of credit ratings-contingent
financial regulation on foreign bank lending behavior. We examine the
sensitivity of international bank flows to debtor countries’ sovereign
credit rating changes before and after the implementation of the Basel 2
risk-based capital regulatory rules. We study the quarterly bilateral flows
from G-10 creditor banking systems to 77 recipient countries over the
period Q4:1999 to Q2:2013. We find direct evidence that sovereign credit
re-ratings that lead to changes in risk-weights for capital adequacy
requirements have become more significant since the implementation of Basel
2 rules for assessing banks’ credit risk under the standardized approach.
This evidence is consistent with global banks acting via their
international lending decisions to minimize required capital charges
associated with the use of ratings-contingent regulation. We find evidence
that banking regulation induced foreign lending has also heightened the
perceived sovereign risk levels of recipient countries, especially those
with investment grade status.
Keywords: cross-border banking; sovereign credit ratings; Basel 2; rating-contingent financial regulation; (follow links to similar papers)
JEL-Codes: E44; F34; G21; H63; (follow links to similar papers)
36 pages, September 21, 2014
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