Ratings-based regulation and systematic risk incentives

Giuliano Iannotta, George Pennacchi, João A. C. Santos

Research output: Contribution to journalArticlepeer-review

11 Citations (Scopus)
1 Downloads (Pure)

Abstract

Our model shows that when regulation is based on credit ratings, banks with low charter value maximize shareholder value by minimizing capital and selecting identically rated loans and bonds with the highest systematic risk. This regulatory arbitrage is possible if the credit spreads on same-rated loans and bonds are greater when their systematic risk (debt beta) is higher. We empirically confirm this relationship between credit spreads, ratings, and debt betas. We also show that banks with lower capital select syndicated loans with higher debt betas and credit spreads. Banks with lower charter value choose overall assets with higher systematic risk.

Original languageEnglish
Pages (from-to)1374-1415
Number of pages42
JournalReview Of Financial Studies
Volume32
Issue number4
DOIs
Publication statusPublished - 1 Apr 2019

Fingerprint

Dive into the research topics of 'Ratings-based regulation and systematic risk incentives'. Together they form a unique fingerprint.

Cite this