Rating systems, procyclicality and Basel II: an evaluation in a general equilibrium framework

The introduction of Basel II has raised concerns about the possibleimpact of risk-sensitive capital requirement on the business cycle. Several approaches have been proposed to deal with the procyclicality issue.In this paper we take a general equilibrium one, which is an appropriateframework for a comprehensive analysis of different proposals since it allows to account for banks\u2019 endogenous strategies in relation to the other agents\u2019 behaviour. The aim of the present paper is to set up a model which allows to evaluate different rating systems in relation to the procyclicality issue. Our set up extends previous models so as to allow the analysis of both the effects of different rating systems on banks\u2019 portfolios (as e.g. in Catarineu-Rabell et al. 2005) and the contagion effetcs relevant to financial stability (as e.g. in Goodhart et al. 2005). The paper presents a comparative statics analysis evluating a cycle-dependent and a neutral rating system with main focus on the banks\u2019 point of view