Credit rating and bank behavior in India: Possible implications of the new Basel accord

Nachane, D M and Ghosh, Saibal (2004): Credit rating and bank behavior in India: Possible implications of the new Basel accord. Published in: Singapore Economic Review , Vol. 49, (2004): pp. 37-54.

Abstract

The paper examines the impact of credit rating on capital adequacy ratios of Indian state-owned banks using quarterly data for the period 1997:1 to 2002:4. To this end, a multinomial logit model with multi credit rating indicators as dependent variable is estimated. The variables that can impinge upon capital adequacy ratio have been used as explanatory variables. Two separate models — one for long-term credit rating and another for short-term credit rating—have been estimated. The paper concludes that, both for short-term as well as for long-term ratings, capital adequacy ratios are an important factor impinging on credit rating of Indian state-owned banks.

• Item Type: MPRA Paper
• Language: English
• Keywords: banknig; capital adequacy; credit rating; multinomial logit model; India
• Subjects: C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C33 - Panel Data Models ; Spatio-temporal Models; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages; P - Economic Systems > P5 - Comparative Economic Systems > P52 - Comparative Studies of Particular Economies

References

Anderson, T.W. (1969). “Statistical Inference for Covariance Matrices with Linear Structure”. In P.R. Krishnaiah (ed.) Proceedings of the Second International Symposium on Multivariate Analysis, Academic Press, New York.

Bank for International Settlements (1999). A New Capital Adequacy Framework, June, Basel, Switzerland.

Bank for International Settlements (2002). Basel Committee Reaches Agreement on New Capital Accord Issues, July, Basel, Switzerland.

Bank for International Settlements (2003). The New Basel Capital Accord: Consultative Document, April, Basel, Switzerland.

Caprio, G. Jr. and M.S. Martinez Peria (2000). Avoiding Disaster: Policies to Reduce the Risk of Banking Crises. Egyptian Centre for Economic Studies, Working Paper No. 47, November.

Chamberlain, G. (1984). Panel Data. In Z.Griliches & M.Intrilligator (eds.) Handbook of Econometrics Vol. II. North-Holland, Amsterdam.

Demirguc-Kunt, A. and Detragiache, E. (1998a). Financial Liberalisation and Financial Fragility, paper presented at the annual World Bank Conference on Development Economics,Washington, D.C.

Demirguc-Kunt, A. and Detragiache, E. (1998b). The Determinants of Banking Crises in Developing and Developed Countries. IMF Staff Papers, 45, pp. 81–109.

Dietrich, J.K and James, C. (1983). Regulation and the Determination of Bank Capital Charges. Journal of Finance, 38, pp. 1651–1658.

Ediz, T., I. Michael and Perraudin, W. (1998). The Impact of Capital Requirements on UK Bank Behaviour. Federal Reserve Bank of New York Economic Policy Review. October, pp. 15–22.

Ferri, G., L. Liu and Majnoni, G. (2001). The Role of Rating Agency Assessments in Less Developed Countries: Impact of the Proposed Basel Guidelines. Journal of Banking and Finance, 25, pp. 115–148.

Government of India (1998). Report of the Committee on Banking Sector Reforms (Chairman: Shri M. Narasimham), Government of India, New Delhi.

Greene,W.H. (1990). Econometric Analysis, Prentice-Hall, New Jersey, USA.

Greenspan, A. (1998). The Role of Capital in Optimal Banking Supervision and Regulation, Federal Reserve Bank of New York, Economic Policy Review, October, pp. 163–168.

Hawkins, J and Mihaljek, D. (2001). The Banking Industry in the Emerging Market Economies: Competition, Consolidation and Systemic Stability-An Overview. In The Banking Industry in the Emerging Market Economies: Competition; Consolidation and Systemic Stability, BIS Policy Papers No. 4, BIS: Basel.

Jackson, P. and Perraudin, W. (1999). The Nature of Credit Risk: The Effect of Maturity, Type of Obligator, and Country of Domicile. Financial Stability Review, November, Bank of England: London, pp. 122–150.

Kamin, S. B. and von Kleist, K. (1999). The Evolution and Determinants of Emerging Market Credit Spreads in the 1990s. BISWorking Paper No. 68, Bank for International Settlements: Switzerland.

Karacadag, C. and Taylor, M.W. (2000). The New Capital Adequacy Framework: Institutional Constraints and Incentive Structures, IMF Working Paper No. 93, IMF, Washington, D. C.

Keeley, M. (1988). Bank Capital Regulation in the 1980s: Effective or Ineffective? Federal Reserve Bank of San Francisco Economic Review, Winter, pp. 3–20.

Kimball, D.J. and James, C. (1983). Regulation and the Determination of Bank Capital Changes. Journal of Finance, 38, pp. 1651–1658.

Kroszner, R.S. and Strahan, P.E. (2001). Bankers on Boards: Monitoring, Conflicts of Interests and Lender Liability. Journal of Financial Economics, 62, pp. 415–452.

Mingo, J. (1975). Regulatory Influence on Bank Capital Investment. Journal of Finance, 30, pp. 1111–1121.

Monfort, B. and Mulder, C. (2000). Using Credit Ratings for Capital Requirements on Lending to Emerging Market Economies: Possible Impact of a New Basel Accord. IMF Working Paper No. 69, IMF, Washington.

Musch, F.C. (1997). Applying Basel Standards in Developing and Transition Economies, In C.Enoch and J.H.Green (eds.), Banking Soundness and Monetary Policy. IMF, Washington, D.C.

Nachane, D.M., Narain, A. Ghosh, S. Ghosh and Sahoo, S. (2000). Capital Adequacy Requirements and the Behaviour of Commercial Banks in India: An Analytical and Empirical Study, DRG Study No. 22, Reserve Bank of India, Mumbai.

Peltzman, S. (1970). Capital Investment in Commercial Banking and Its Relationship to Portfolio Regulation. Journal of Political Economy, 78, pp. 1–26.

Reserve Bank of India (2000). Comments of the RBI on a New Capital Adequacy Framework, Reserve Bank of India, Mumbai.

Reserve Bank of India (2003). Report on Currency and Finance, 2001–02, Reserve Bank of India, Mumbai.

Swindle, C.S. (1995). Using CAMEL Rating to Evaluate Regulator Effectiveness at Commercial Banks. Journal of Financial Services Research, 8, pp. 123–141.