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Will Central Counterparties become the New Rating Agencies?

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  • Chris Kenyon
  • Andrew Green

Abstract

Central Counterparties (CCPs) are widely promoted as a requirement for safe banking with little dissent except on technical grounds (such as proliferation of CCPs). Whilst CCPs can have major operational positives, we argue that CCPs have many of the business characteristics of Rating Agencies, and face similar business pressures. Thus we see a risk that prices from CCPs may develop the characteristics attributed to ratings from Rating Agency pre-crisis. Business over-reliance on ratings of questionable accuracy is seen as a cause of the financial crisis. We see the potential for same situation to be repeated with prices from CCPs. Thus the regulatory emphasis on CCPs, rather than on collateralization, may create the preconditions for an avoidable repeat of the financial crisis.

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  • Chris Kenyon & Andrew Green, 2012. "Will Central Counterparties become the New Rating Agencies?," Papers 1211.6349, arXiv.org, revised Nov 2012.
    • Handle: RePEc:arx:papers:1211.6349
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    1. Efraim Benmelech & Jennifer Dlugosz, 2010. "The Credit Rating Crisis," NBER Chapters, in: NBER Macroeconomics Annual 2009, Volume 24, pages 161-207, National Bureau of Economic Research, Inc.
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