How the Proposed Basel Guidelines on Rating-Agency Assessments Would Affect Developing Countries
Using historical data on sovereign and individual borrowers, the authors assess the potential impact on non-high-income countries of linking capital asset requirements for banks to private sector ratings, as the Basel committee has proposed. They s...
| Main Authors: | , , |
|---|---|
| Format: | Policy Research Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2014
|
| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2000/06/437179/proposd-basel-guidelines-rating-agency-assessments-would-affect-developing-countries http://hdl.handle.net/10986/19835 |
| Summary: | Using historical data on sovereign and
individual borrowers, the authors assess the potential
impact on non-high-income countries of linking capital asset
requirements for banks to private sector ratings, as the
Basel committee has proposed. They show that linking
bank's capital asset requirements to external ratings
would have undesirable effects for developing countries.
First, ratings of banks and corporations in developing
countries are less common, so capital asset requirements
would be practically insensitive to improvements in the
quality of assets-widening the gap between banks of equal
financial strength in higher- and lower-income countries.
Second, bank and corporate ratings in developing countries
(unlike their counterparts in high-income countries) are
strongly linked to the sovereign ratings for the country-and
appear to be strongly related (asymmetrically) to changes in
the sovereign ratings. A sovereign downgrading would bring
greater changes in capital allocations than an upgrading,
and would call for larger capital requirements at the very
time access to capital markets was more difficult. Under the
new guidelines, capital requirements in developing countries
would thus be exposed to the cyclical swings associated with
the revision of sovereign ratings in recent crises.
Ultimately, linking banks' capital asset requirements
to private sector ratings would reduce the credit available
to non-high-income countries and make it more costly,
limiting economic activity. Bank capital needs in developing
countries would be more volatile than those in high-income
countries. These findings suggest that the Basel Committee
should assess the role it proposes assigning to external
ratings, to minimize the detrimental impact of the
regulatory use of such ratings on developing countries. |
|---|