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http://ssrn.com/abstract=2357145
 
 

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The Removal of Credit Ratings from Capital Regulation: Implications for Systemic Risk


Kathleen Weiss Hanley


University of Maryland

Stanislava Nikolova


University of Nebraska - Lincoln

July 1, 2014


Abstract:     
We examine whether removing references to credit ratings from regulations, as mandated by the Dodd-Frank Act, affects the transmission of systemic risk through the asset liquidation channel. We analyze an initiative to reduce reliance on ratings for capital adequacy assessment in the insurance industry and its effect on insurers’ investment and financing decisions. After the change, insurers are less likely to repair regulatory capital by selling distressed MBS, gains trading corporate bonds, or raising external capital. However, the new regime allows insurers to purchase more low-rated MBS. Thus, the initiative may limit systemic risk transmission through the asset liquidation channel, but at the expense of more risk-taking than prudential regulators may prefer.

Number of Pages in PDF File: 54

Keywords: Credit Ratings, Systemic Risk, Capital Regulation, Dodd-Frank Act, Insurance Industry, RMBS, CMBS, Corporate Bonds, FSOC

JEL Classification: G22, G28, G31

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Date posted: November 20, 2013 ; Last revised: August 6, 2014

Suggested Citation

Hanley , Kathleen Weiss and Nikolova, Stanislava, The Removal of Credit Ratings from Capital Regulation: Implications for Systemic Risk (July 1, 2014). Available at SSRN: http://ssrn.com/abstract=2357145 or http://dx.doi.org/10.2139/ssrn.2357145

Contact Information

Kathleen Weiss Hanley (Contact Author)
University of Maryland ( email )
College Park, MD 20742
United States
Stanislava Nikolova
University of Nebraska - Lincoln ( email )
Lincoln, NE 68588-0490
United States
402-472-6049 (Phone)
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