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Financial institutions regulation and systematic risk

Author

Listed:
  • Giuliano Iannotta

    (Università Cattolica)

  • George Pennacchi

    (University of Illinois)

Abstract

Does a regulation based on credit ratings create an incentive to make loans and invest in bonds that have relatively high systematic risk? Using an international sample of almost 4,000 bonds, we test whether credit rating basedregulation can create moral hazard. The results of the study show that systematic risk has a significant and positive effect on bonds’ credit spread, thus creating an incentive for financial institutions to increase systematic risk

Suggested Citation

  • Giuliano Iannotta & George Pennacchi, 2014. "Financial institutions regulation and systematic risk," BANCARIA, Bancaria Editrice, vol. 9, pages 22-36, September.
  • Handle: RePEc:ban:bancar:v:09:y:2014:m:september:p:22-36
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    File URL: http://www.bancaria.it/en/financial-institutions-regulation-and-systematic-risk
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    More about this item

    JEL classification:

    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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