Credit ratings and the BIS capital adequacy reform agenda

Edward I. Altman, Sreedhar T. Bharath, Anthony Saunders

Research output: Contribution to journalArticle

29 Scopus citations

Abstract

In this paper, we have revised and updated our earlier study in order to analyze the most recent (second) draft of the BIS's proposed reforms of bank capital requirements. We conduct Monte-Carlo experiments using data on defaults and severity rates on publicly-traded US corporate bonds over the 1981-1999 period. Analyzing the whole period and various sub-periods, it is clear that the most recent draft of the BIS proposed reforms seriously overestimates the relative riskiness of high-quality debt relative to low quality debt in the so-called standardized model. As a result, the most recent proposal still contains inherent risk-shifting (taking) incentives for banks.

Original languageEnglish (US)
Pages (from-to)909-921
Number of pages13
JournalJournal of Banking and Finance
Volume26
Issue number5
DOIs
StatePublished - Jan 1 2002
Externally publishedYes

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Keywords

  • Basel II
  • Bond defaults
  • Capital adequacy
  • Credit ratings
  • Default losses

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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