Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/77655 
Authors: 
Year of Publication: 
2013
Series/Report no.: 
CESifo Working Paper No. 4267
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
This paper models the strategic interaction between a rating agency, a bank and a bank regulator who lacks information about bank asset risk. The regulator can either (1) make bank capital requirements contingent on credit ratings; or (2) set rating-independent capital requirements. Truthful ratings provide efficiency gains because they allow the regulator to constrain high risk bank investment without simultaneously reducing overall investment volume. However, if collusion between the rating agency and the bank corrupts rating quality, rating-independent regulation enhances welfare. The welfare benefits are largest if regulators maintain rating-contingent capital requirements and discipline rating agencies.
Subjects: 
bank regulation
Lucas critique
collusion
ratings inflation
risk-shifting
JEL: 
D82
G21
G24
G28
Document Type: 
Working Paper
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