Regulatory Reform and Risk-Taking: Replacing Ratings

44 Pages Posted: 17 Jul 2013 Last revised: 3 Sep 2014

See all articles by Bo Becker

Bo Becker

Stockholm School of Economics; Centre for Economic Policy Research (CEPR); ECGI

Marcus M. Opp

Stockholm School of Economics - Department of Finance; Swedish House of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: September 2, 2014

Abstract

We analyze a reform of insurance companies’ capital requirements for mortgage-backed securities. First, credit ratings were replaced as inputs to capital regulation. Second, the redesigned system ensures capital buffers sufficient to withstand expected losses, but insufficient to protect against adverse outcomes. Many bonds are now treated as riskless and require minimal capital. By 2012, aggregate capital requirements for mortgage-backed securities have been reduced from $19.36bn (had the previous system been maintained) to $3.73bn. Exploiting that the change did not affect other asset classes, we document that insurers’ risk taking was distorted and increased in response to the new regulation.

Note: (A previous version of this paper was entitled "Replacing Ratings")

Keywords: Financial Regulation, Rating Agencies, Alternatives to Credit Ratings, Financial Crisis, Insurance Industry, Capital Regulation, Dodd-Frank Act

JEL Classification: G28, G22

Suggested Citation

Becker, Bo and Opp, Marcus M., Regulatory Reform and Risk-Taking: Replacing Ratings (September 2, 2014). Swedish House of Finance Research Paper No. 13-03, Available at SSRN: https://ssrn.com/abstract=2294416 or http://dx.doi.org/10.2139/ssrn.2294416

Bo Becker

Stockholm School of Economics ( email )

Drottninggatan 98
Dept. of Finance
111 60 Stockholm, 11160
Sweden

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

ECGI ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Marcus M. Opp (Contact Author)

Stockholm School of Economics - Department of Finance ( email )

SE-113 83 Stockholm
Sweden

Swedish House of Finance

Drottninggatan 98
111 60 Stockholm
Sweden

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
413
Abstract Views
2,626
rank
72,040
PlumX Metrics