The Effects of Ratings-Contingent Regulation on International Bank Lending Behavior: Evidence from the Basel 2 Accord

36 Pages Posted: 22 Oct 2014 Last revised: 5 May 2015

See all articles by Iftekhar Hasan

Iftekhar Hasan

Fordham University - Gabelli School of Business; Bank of Finland

Suk-Joong Kim

The University of Sydney Business School

Eliza Wu

The University of Sydney - Business School; Financial Research Network (FIRN)

Multiple version iconThere are 2 versions of this paper

Date Written: September 20, 2014

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.

Keywords: cross-border banking, sovereign credit ratings, Basel 2, rating-contingent financial regulation

JEL Classification: E44, F34, G21, H63

Suggested Citation

Hasan, Iftekhar and Kim, Suk-Joong and Wu, Eliza, The Effects of Ratings-Contingent Regulation on International Bank Lending Behavior: Evidence from the Basel 2 Accord (September 20, 2014). Journal of Banking and Finance, Forthcoming; Bank of Finland Research Discussion Paper No. 25/2014. Available at SSRN: https://ssrn.com/abstract=2512754 or http://dx.doi.org/10.2139/ssrn.2512754

Iftekhar Hasan (Contact Author)

Fordham University - Gabelli School of Business ( email )

Rose Hill Campus Bronx
New York, NY 10458
United States

Bank of Finland ( email )

P.O. Box 160
Helsinki 00101
Finland

Suk-Joong Kim

The University of Sydney Business School ( email )

Cnr. of Codrington and Rose Streets
Sydney, NSW 2006
Australia
+61 2 9114 0940 (Phone)
+61 2 9351 6461 (Fax)

Eliza Wu

The University of Sydney - Business School ( email )

University of Sydney
Darlington
Sydney, NSW 2006
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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