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The regulatory use of credit ratings in bank capital requirement regulations

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Abstract

The paper addresses recent developments in international bank capital requirement regulations. A major change over the last decade has been the involvement of credit rating agencies in the measurement of bank capital requirements in the Basel II Accord. The proposed way of proceeding is expected to incentivise banks to improve their risk management practices. The authors argue, however, that the ratings-based regulation has negative effects on the financial markets. The paper analyses its effects on the credit rating industry as well as on the banking business. It is recommended that regulators reconsider the use of credit ratings in financial market regulation.

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Acknowledgements

We thank Professor Kern Alexander, University of Cambridge, UK, for his valuable comments.

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  1. University of Zurich, Rämistrasse 74138, Zurich, 8001, Switzerland

    Rolf H Weber & Aline Darbellay

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  1. Rolf H Weber
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Correspondence to Rolf H Weber.

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1 Rolf H. Weber is Ordinary Professor for Civil, Commercial and European Law at the University of Zurich and Visiting Professor at the University of Hong Kong. He is at the head of the project ‘Law, Regulation and Finance’, which is one specific topic of the research programme ‘Finance and Financial Market’ at the University of Zurich. He is Director of the European Law Institute and the Center for Information and Communication Law at the University of Zurich. In addition, he is engaged as an attorney-at-law and as a Member of the Editorial Board of several Swiss and international legal periodicals.

2 Aline Darbellay is research assistant at the University of Zurich. She has been active in the topic ‘Law, Regulation and Finance’ of the research programme ‘Finance and Financial Market’. She is currently working on projects in financial market regulation. She holds a Master's of Law from the University of Lausanne.

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Weber, R., Darbellay, A. The regulatory use of credit ratings in bank capital requirement regulations. J Bank Regul 10, 1–16 (2008). https://doi.org/10.1057/jbr.2008.22

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