The authors examine whether the Basel capital framework that introduced the ratings-based system for the regulation banks had any profound effect on the link between finance and economic growth. Hassan, Hassan and Kin (2016) review the GDP growth per capita and the rate of international bank lending across 77 countries from 1999 to 2013 to get their results. The results revealed that ever since the Basel 2 capital regulations were implemented, the weight of risk associated with sovereign credit rating systems have had a significant effect on economic growth in both the lending and recipient states. Hassan, Hassan and Kin (2016) also found evidence that indicates the tendency of multinational banks to increase overseas lending to sovereign investments due to the lower risks, has contributed to reduced economic growth in the beneficiary nations. Nonetheless, the negative effects of the Basel regulations are negated due to the presence of open financial markets that have more advanced banking systems.
Hassan, Hassan and Kin (2016) conclude that the results mentioned above will have apparent effects for the upcoming Basel 3 regulations that are being implemented progressively across the globe. The Basel 3 rules will usher in a capital ratio that reduces risk of investment; it will be an important benchmark for financial markets in the future. Due to this and the increasingly narrow definition of regulatory capital, the association between the lending decisions that banks make and risk weight transforms. Ultimately, the association between finance and economic growth will become more prominent. Since the researchers establish the link between the ratings-based regulation and credit allocation by multinational banks, future studies should focus on the impact of ratings-based regulation on distribution of income.
Venkateshwara and Hanumantha (2012) analyze the role of credit rating services in the Indian financial sector by evaluating how the sector helps in the evaluation of risk and return on investments. They place their focus on new and existing Indian companies which have sourced their financing from the capital markets from 2000-2010. The authors note that the competition among corporations for investors has increased rapidly. This has been facilitated by the rise credit rating businesses which have helped to reduce the gap of knowledge that existed between lenders and investors, on one hand, and issuers, on the other hand, regarding the creditworthiness of countries and companies. Venkateshwara and Hanumantha (2012) also note that the credit rating sector in India is very significant since it is the platform that facilitates economic growth due to three factors. These include; increased circulation of money in the Indian market; reduced dependency on the cooperate bond market, and implementation of the Basel 2 regulations. On top of this, they note that credit rating is important for the development of financial markets. The increased circulation of money in the market is brought about by capital investments that have been enabled by debt. Due to better access to debt services, the dependency on the cooperate bond market is reduced.
The authors conclude that an investment grade rating can enhance the reputation of a country,
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