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10 J. Banking Reg. 1 (2008-2009)

handle is hein.journals/jlbkrg10 and id is 1 raw text is: www.palgrave-journals.com/jbr/ Papers The regulatory use of credit ratings in bank capital requirement regulations Rolf H. Weber* and Aline Darbellay *University of Zurich, Ramistrasse 74138, 8001 Zurich, Switzerland. tel.: +41 44 634 48 86; fax: +41 44 634 43 95; e-mail: rolf.weber@rwi.unizh.ch Rolf H. Weber is Ordinary Professor for Civil, Commercial and European Law at the Uni- versity of Zurich and Visiting Professor at the University of Hong Kong. He is at the head of the project 'Law, Regulation and Finance', which is one specific topic of the research programme 'Finance and Financial Market' at the University of Zurich. He is Director of the European Law Institute and the Center for Information and Communication Law at the University of Zurich. In addition, he is engaged as an attorney-at-law and as a Member of the Editorial Board of several Swiss and interna- tional legal periodicals. Aline Darbellay is research assistant at the University of Zurich. She has been active in the topic 'Law, Regulation and Finance' of the research programme 'Finance and Financial Market'. She is currently working on projects in financial market regulation. She holds a Master's of Law from the University of Lausanne. ABSTRACT The paper addresses recent developments in interna- tional bank capital requirement regulations. A major change over the last decade has been the involvement of credit rating agencies in the measurement of bank capital requirements in the Basel II Accord. The proposed way of proceeding is expected to incentivise banks to improve their risk management practices. The authors argue, however, that the ratings-based regulation has negative effects on the financial markets. The paper analyses its effects on the credit rating industry as well as on the banking business. It is recommended that regulators reconsider the use of credit ratings in financial market regulation. Journal of Banking Regulation (2008) 10, 1-16. doi:10.1057/jbr.2008.22 INTRODUCTION Banking regulation is essentially justified by the necessity of providing a safety net for the protection of depositors from the risk of bank failures.1 In particular, bank capital require- ments are designed in many legal frameworks to guarantee banks' financial stability. The Basel Committee on Banking Supervision (BCBS) has been entrusted with the creation of minimum standards for internationally active banks. Such kinds of minimum levels of capital are enshrined in Basel II. This Accord, approved by the BCBS in June 2004 and replacing the older framework of 1988, reflects the result of its work to promote international convergence on supervisory regulations.2 Therefore, the framework has significant effects on the new legislation enacted in the countries participating in Basel II. Furthermore, even if the framework is not directly legally binding on the banks, it has - regardless of the establishment of new national frameworks - repercussions on the banks' management practices. Indeed, banks benefit from meeting © 2008 Palgrave Macmillan, 1745-6452 Vol. 10, 1 1-16 Journal of Banking Regulation 1

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