Perverse effects of a ratings-related capital adequacy system

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World Bank, Policy Research Dissemination Center, 2000 - Business & Economics - 14 pages
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It is important to harness market information to improve bank safety (for example, by increasing the role of large, well-informed, but uninsured claimants) but the approach of a ratings-related capital adequacy system could be counterproductive. Relying on ratings could induce borrowers to increase their exposure to systemic risk even if they reduce exposure to specific risk.

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