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Contribution Details
| Type | Conference Presentation |
| Scope | Discipline-based scholarship |
| Title | The Impact of Rating Standards on Financial Institution Risk-Taking. Evidence from Catastrophe Risks in Insurance. |
| Organization Unit | |
| Authors |
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| Presentation Type | paper |
| Item Subtype | Original Work |
| Refereed | Yes |
| Status | Published electronically before print/final form (Epub ahead of print) |
| Language |
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| Event Title | Annual Congress of the Financial Management Association (FMA) |
| Event Type | conference |
| Event Location | Denver |
| Event Start Date | October 20 - 2021 |
| Event End Date | October 23 - 2021 |
| Abstract Text | We analyze how financial institutions adjust their risk-taking in response to stricter rating standards. Building on the premise that the demand for financial institutions services depends on their financial strength which is communicated by a rating, we argue that a more stringent rating standard induces a di¤erential response. Financial institutions facing high (low) elasticity of demand to ratings and moderate (high) cost of raising capital improve (weaken) their financial strength in response to a stricter rating standard. We empirically assess the response to stricter standards using a significant change of the rating methodology for natural catastrophe risk exposures of insurers in the aftermath of hurricane Katrina. We find the differential response, revealing that lower financial strength insurers serving customers with low elasticity of demand to financial strength became more risky in response to the standard change. |
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