Rating targeting and the confidence levels implicit in bank capital
Jokivuolle, Esa; Peura, Samu (08.09.2006)
Numero
27/2006Julkaisija
Suomen Pankki
2006
Julkaisun pysyvä osoite on
https://urn.fi/URN:NBN:fi:bof-20140807552Tiivistelmä
The solvency standards implicit in bank capital levels, as reported eg in Jackson et al (2002), are much higher than those required for top ratings, if standard single period economic capital models are taken seriously.We explain this excess capital puzzle by forward looking rating targeting behaviour by banks, which aims at maintaining rating above a minimum target in future periods.We calibrate to data on actual bank capital the confidence level used by the median US AA rated bank to maintain at least a single A rating.The calibrated confidence level is in line with the historical probability of an AA rated bank to be downgraded below A. Key words: bank capital, credit rating, value-at-risk, economic capital, capital structure JEL classification numbers: G21, G32
Julkaisuhuomautus
Published in Journal of Risk, Volume 12, No. 4, 2010, Pages 3-13