Activities per year
We investigate whether the omission of systematic risk in rating-based capital regulation induces strategic bond portfolio allocations that decrease financial stability. Capital regulation does not constrain systematic risk-taking by using credit ratings. We verify that this incentivizes banks and insurance corporations to hoard bonds with excessive systematic risk using a confidential bond-level holdings dataset of the ECB. Our findings highlight three interconnected channels through which this systematic risk-taking reduces financial stability by increasing the likelihood and severity of fire sales. Therefore, omitting systematic risk in capital regulation increases the fragility of the financial sector, especially in economic downturns.
|Publisher||De Nederlandsche Bank|
|Publication status||Published - 13 Feb 2020|
|Series||De Nederlandsche Bank Working Papers|
- g11 - "Portfolio Choice; Investment Decisions"
- g21 - "Banks; Depository Institutions; Micro Finance Institutions; Mortgages"
- g22 - "Insurance; Insurance Companies"
- g24 - "Investment Banking; Venture Capital; Brokerage; Ratings and Ratings Agencies"
- g28 - Financial Institutions and Services: Government Policy and Regulation
- Inflated credit ratings
- capital requirements
- regulatory arbitrage
- Basel III
- Solvency II
- portfolio choice
- securities holdings statistics
- 1 Talk or presentation - at conference
Credit Ratings, Regulatory Arbitrage and Capital Requirements: Do Investors Strategically Allocate Bond Portfolios?
Martijn Adriaan Boermans (Speaker) & Bram van der Kroft (Speaker)1 Oct 2020
Activity: Talk or presentation / Performance / Speeches › Talk or presentation - at conference › Academic