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IPEDR 2015 Vol.84: 17-24 ISSN: 2010-4626
DOI: 10.7763/IPEDR.2015.V84.4

Credit Rating Agencies’ Decisions and I.S.D.A.’s Credit Events: Effects on Banking Liquidity and Legal Contracts

Athanasios G. Panagopoulos and Thomas Chatzigagios
 
Abstract—This paper aims the research whether involving Credit Ratings Agencies (CRAs), regarding the provision of credit risk rating for the banking structured products, as well as the credit clauses of ISDA (International Swaps and Derivatives Association) signed agreements between banks, could affect the banking liquidity. The research work focuses on the existing regulation and the literature for CRAs and on whether a proposed set of regulation reforms could aim in manipulating future crisis in the finance environment. The ISDA operation, the legal framework of its proposed contracts (for banking products transactions) and the decisions of its committees are factors, which can also influence the operation of these products and the banking liquidity. Throughout this system, a procedure occurs with which the activation of hedging instruments (as Credit Default Swaps) is decided, when a "credit event" takes place. The research effort is also based on the study of ISDA contracts as legal tool protecting the banks, bilaterally, from credit event risks. Under this reasoning, we have examined the liquidity effects concerning banks and how this is involved with the changes of the credit ratings. The paper reviews the current European legislation of CRAs, as well as the policy of ISDA through its contracts and from the results ended, suggests specific legislative interferences and changes in ISDA’s agreement clauses, to preserve the banking liquidity.

Index Terms—CRAs, Credit Events, CDS, ISDA, Master Agreement, CSA, Legal agreements, Liquidity, Rating trigger.

University of Macedonia, Thessaloniki, Greece

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Cite: Athanasios G. Panagopoulos and Thomas Chatzigagios, "Credit Rating Agencies’ Decisions and I.S.D.A.’s Credit Events: Effects on Banking Liquidity and Legal Contracts vol. 84, pp. 17-24, 2015.

 
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