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The Optimal Regulation of Credit Rating Agencies

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Author Info
Forster, Josef
Abstract

Credit rating agencies (CRAs) very often have been criticized for announcing inaccurate credit ratings and are suspected of being exposed to conflicts of interest. Despite these objections CRAs remained largely unregulated. Based on Pagano & Immordino (2007), we study the optimal regulation of CRAs in a model where rating quality is unobservable and enforcing regulation is costly. The model shows that minimum rating standards increase the social value of credit ratings. The model also analyzes implications for regulation in the presence of conflicts of interest between the CRA and the rated clients by direct bribes and by the joint provision of rating and consulting services.

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Paper provided by University of Munich, Department of Economics in its series Discussion Papers in Economics with number 5169.

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Date of creation: 25 Jul 2008
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Handle: RePEc:lmu:muenec:5169

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Related research
Keywords: credit rating agencies; regulation; conflicts of interest;

Find related papers by JEL classification:
G20 - Financial Economics - - Financial Institutions and Services - - - General
G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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  1. Millon, Marcia H & Thakor, Anjan V, 1985. " Moral Hazard and Information Sharing: A Model of Financial Information Gathering Agencies," Journal of Finance, American Finance Association, vol. 40(5), pages 1403-22, December. [Downloadable!] (restricted)
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  2. Giovanni Immordino & Marco Pagano, 2005. "Optimal Regulation of Auditing," CSEF Working Papers 133, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 01 May 2007. [Downloadable!]
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  3. Bondonio, Daniele, 2002. "Evaluating the Employment Impact of Business Incentive Programs in EU Disadvantaged Areas. A case from Northern Italy," P.O.L.I.S. department's Working Papers 27, Department of Public Policy and Public Choice - POLIS. [Downloadable!]
  4. Richard Cantor & Frank Packer, 1994. "The credit rating industry," Quarterly Review, Federal Reserve Bank of New York, issue Sum, pages 1-26.
  5. Lawrence J. White, 2001. "The Credit Rating Industry: An Industrial Organization Analysis," Working Papers 01-02, New York University, Leonard N. Stern School of Business, Department of Economics. [Downloadable!]
  6. Dye, Ronald A, 1993. "Auditing Standards, Legal Liability, and Auditor Wealth," Journal of Political Economy, University of Chicago Press, vol. 101(5), pages 887-914, October. [Downloadable!] (restricted)
  7. Arnoud W. A. Boot & Todd T. Milbourn & Anjolein Schmeits, 2006. "Credit Ratings as Coordination Mechanisms," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 19(1), pages 81-118. [Downloadable!] (restricted)
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  8. Cantor, Richard, 2004. "An introduction to recent research on credit ratings," Journal of Banking & Finance, Elsevier, vol. 28(11), pages 2565-2573, November. [Downloadable!] (restricted)
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