Optimal banks behaviour and procyclicality

A relevant issue in the procyclicality debate over Basel II is the type of rating which could be preferred from both an individual and an economy-wide point of view in the light of the relation between capital requirements and the business cycle. The objective of the present paper is to evaluate the profitability of different rating systems within a general equilibrium approach in the presence of capital requirements consistent with Basel II. To this end, we model the optimizing behaviour of three sectors: households, corporates and banking sector and we analyse banks optimal behaviour and its effects on the economy as a whole.