March 05, 2019

Bad bank regulations have placed the procyclicality of credit ratings on steroids

Sir, Joe Rennison writes: “Big US companies [have] spent the years since the financial crisis gorging on cheap debt [forgoing] higher credit ratings and [slipping] down into the lower reaches of borrowers deemed “investment grade”, which implies a relatively low risk of default. Growing debt piles have fed fears among investors that… worsening economic conditions… could potentially send credit ratings even lower, into the junkyard of ‘high yield’ [which would make the financing more expensive and thereby increase the difficulties]” “Investors urge debt-bloated US companies to shape up” March 5.

Good times allow good credit ratings giving an easy going; bad times produce worse credit ratings causing harder goings. No doubt credit ratings are procyclical. But then consider the fact that current risk weighted capital requirements for banks, better credit ratings less capital – worse credit ratings more capital, places an additional level of procyclicality on top of it all, and one of the principal faults of Basel Committee’s should lay bare in front of you. 


@PerKurowski