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Annals of Finance

, 6:33 | Cite as

Rating systems, procyclicality and Basel II: an evaluation in a general equilibrium framework

  • Chiara Pederzoli
  • Costanza Torricelli
  • Dimitrios P. Tsomocos
Research Article

Abstract

The introduction of Basel II has raised concerns about the potential impact of risk-sensitive capital requirements on the business cycle. Several approaches have been proposed to assess the procyclicality issue. In this paper, we adopt a general equilibrium model and conduct comprehensive analysis of different proposals. We set out a model that allows to evaluate different rating systems in relation to the procyclicality issue. Our model extends previous models by analysing the effects of different rating systems on banks’ portfolios (as in Catarineu et al. in Econ Theory 26:537–557, 2005) and the contagion effects relevant to financial stability (as in Goodhart et al. in Ann Finance 1:197–224, 2005). The paper presents comparative statics results comparing a cycle-dependent and a neutral rating system from the point of view of banks profit maximization. Our results suggest that banks’ preferences about point in time or through the cycle rating systems depend on the banks’ characteristics and on the business cycle conditions in terms of expectations and realizations.

Keywords

Procyclicality Rating systems Basel II General equilibrium 

JEL Classification

D58 E44 G21 G38 

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Copyright information

© Springer-Verlag 2009

Authors and Affiliations

  • Chiara Pederzoli
    • 1
  • Costanza Torricelli
    • 2
  • Dimitrios P. Tsomocos
    • 3
  1. 1.University of Milano-Bicocca and CEFINMilanItaly
  2. 2.University of Modena and Reggio Emilia and CEFINModenaItaly
  3. 3.St. Edmund Hall and Saïd Business School, University of OxfordOxfordUK

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