Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/212300 
Year of Publication: 
2014
Series/Report no.: 
Bank of Finland Research Discussion Papers No. 25/2014
Publisher: 
Bank of Finland, Helsinki
Abstract: 
We investigate the effects of credit ratings-contingent financial regulation on foreign bank lending behavior. We examine the sensitivity of international bank flows to debtor countries' sovereign credit rating changes before and after the implementation of the Basel 2 risk-based capital regulatory rules. We study the quarterly bilateral flows from G-10 creditor banking systems to 77 recipient countries over the period Q4:1999 to Q2:2013. We find direct evidence that sovereign credit re-ratings that lead to changes in risk-weights for capital adequacy requirements have become more significant since the implementation of Basel 2 rules for assessing banks' credit risk under the standardized approach. This evidence is consistent with global banks acting via their international lending decisions to minimize required capital charges associated with the use of ratings-contingent regulation. We find evidence that banking regulation induced foreign lending has also heightened the perceived sovereign risk levels of recipient countries, especially those with investment grade status.
Subjects: 
cross-border banking
sovereign credit ratings
Basel 2
rating-contingent financial regulation
JEL: 
E44
F34
G21
H63
Persistent Identifier of the first edition: 
ISBN: 
978-952-323-002-6
Document Type: 
Working Paper

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