Journal of
Italian
Banking
Association

year 100
 

Forum | Papers » Financial institutions regulation and systematic risk

Financial institutions regulation and systematic risk

Giuliano Iannotta, George Pennacchi
September 2014 - n. 9
Jel codes: G28, G21, G18

Does a regulation based on credit ratings create an incentive to make loans and invest in bonds that have relatively high systematic risk? Using an international sample of almost 4,000 bonds, we test whether credit rating basedregulation can create moral hazard. The results of the study show that systematic risk has a significant and positive effect on bonds’ credit spread, thus creating an incentive for financial institutions to increase systematic risk

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