IDEAS home Printed from https://ideas.repec.org/a/oup/rfinst/v32y2019i4p1374-1415..html
   My bibliography  Save this article

Ratings-Based Regulation and Systematic Risk Incentives

Author

Listed:
  • Giuliano Iannotta
  • George Pennacchi
  • João A C Santos

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.Received July 27, 2016; editorial decision May 29, 2018 by Editor Itay Goldstein.

Suggested Citation

  • Giuliano Iannotta & George Pennacchi & João A C Santos, 2019. "Ratings-Based Regulation and Systematic Risk Incentives," The Review of Financial Studies, Society for Financial Studies, vol. 32(4), pages 1374-1415.
    • Handle: RePEc:oup:rfinst:v:32:y:2019:i:4:p:1374-1415.
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1093/rfs/hhy091
    Download Restriction: Access to full text is restricted to subscribers.
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Viral V. Acharya & Ryan N. Banerjee & Matteo Crosignani & Tim Eisert & Renée Spigt, 2022. "Exorbitant Privilege? Quantitative Easing and the Bond Market Subsidy of Prospective Fallen Angels," Staff Reports 1004, Federal Reserve Bank of New York.
    2. Gunter Löffler, 2020. "The Systemic Risk Implications of Using Credit Ratings Versus Quantitative Measures to Limit Bond Portfolio Risk," Journal of Financial Services Research, Springer;Western Finance Association, vol. 58(1), pages 39-57, August.
    3. Hao Dong & Yingrong Zheng & Na Li, 2023. "Analysis of Systemic Risk Scenarios and Stabilization Effect of Monetary Policy under the COVID-19 Shock and Pharmaceutical Economic Recession," Sustainability, MDPI, vol. 15(1), pages 1-32, January.
    4. Abu Amin & Blake Bowler & Mostafa Monzur Hasan & Gerald L. Lobo & Jiri Tresl, 2020. "Firm Life Cycle and Cost of Debt," CERGE-EI Working Papers wp665, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    5. Mohammed Al‐Hamdani & Kayla M. Joyce & Tristan Park & Megan E. Cowie & Sherry H. Stewart, 2021. "Cannabis packaging: An opportunity for facilitating informed decisions," Journal of Consumer Affairs, Wiley Blackwell, vol. 55(3), pages 1150-1168, September.
    6. Ambrocio, Gene & Hasan, Iftekhar & Jokivuolle, Esa & Ristolainen, Kim, 2020. "Are bank capital requirements optimally set? Evidence from researchers’ views," Journal of Financial Stability, Elsevier, vol. 50(C).
    7. Amin, Abu & Bowler, Blake & Hasan, Mostafa Monzur & Lobo, Gerald J. & Tresl, Jiri, 2023. "Firm life cycle and cost of debt," Journal of Banking & Finance, Elsevier, vol. 154(C).
    8. Dr. Kyriazopoulos Georgios & Thanou Efthymia, 2020. "Mergers and Acquisitions and how they affect the Labor productivity. Evidence from the Greek Banking system," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 10(2), pages 1-3.
    9. Boermans, Martijn A. & van der Kroft, Bram, 2024. "Capital regulation induced reaching for systematic yield: Financial instability through fire sales," Journal of Banking & Finance, Elsevier, vol. 158(C).
    10. deHaan, Ed & Li, Jiacui & Watts, Edward M., 2023. "Retail bond investors and credit ratings," Journal of Accounting and Economics, Elsevier, vol. 76(1).

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:oup:rfinst:v:32:y:2019:i:4:p:1374-1415.. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Oxford University Press (email available below). General contact details of provider: https://edirc.repec.org/data/sfsssea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.