Regulatory reform and risk-taking: replacing ratings / Bo Becker, Marcus Opp.

Format:

Book

Author/Creator:

Becker, Bo.

Contributor:

National Bureau of Economic Research.

Opp, Marcus.

Series:

Working Paper Series (National Bureau of Economic Research) no. w19257.

NBER working paper series no. w19257

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Regulatory reform and risk-taking

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2013.

Summary:

We analyze a reform of insurance companies' capital requirements for mortgage-backed securities. First, credit ratings were replaced as inputs to capital regulation. Second, the redesigned system ensures capital buffers sufficient to withstand expected losses, but insufficient to protect against adverse outcomes. Many bonds are now treated as riskless and require minimal capital. By 2012, aggregate capital requirements for mortgage-backed securities have been reduced from $19.36bn (had the previous system been maintained) to $3.73bn. Exploiting that the change did not affect other asset classes, we document that insurers' risk taking was distorted and increased in response to the new regulation.

Notes:

Print version record

July 2013.