NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Regulatory reform and risk-taking: replacing ratings

Bo Becker, Marcus Opp

NBER Working Paper No. 19257
Issued in July 2013, Revised in September 2014
NBER Program(s):CF

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.

download in pdf format
   (672 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w19257

Users who downloaded this paper also downloaded* these:
Gorton and Metrick w19292 The Federal Reserve and Financial Regulation: The First Hundred Years
Cooper and Nikolov w19278 Government Debt and Banking Fragility: The Spreading of Strategic Uncertainty
Kashyap and Kovrijnykh w18923 Who Should Pay for Credit Ratings and How?
Farhi and Werning w19313 A Theory of Macroprudential Policies in the Presence of Nominal Rigidities
Guiso, Sapienza, and Zingales w19284 Time Varying Risk Aversion
 
Publications
Activities
Meetings
NBER Videos
Themes
Data
People
About

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us