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The financial crisis and the credit rating agencies: the failure of reputation

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  • Miele, Maria Grazia
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    Abstract

    This paper presents a theoretical framework to describe the behaviour of the credit rating agencies(CRAs) during the crisis, surveying some reputational game models. CRAs have been blamed of inflating ratings of the new credit risk transfer products (CRTs) and of acting in favour of issuers instead of investors. This paper addresses three key elements to explain CRAs conduct: misaligned incentives – also favoured by the increasing reliance on ratings - the oligopolistic structure of the ratings’ industry and the inadequacy of the credit risk models used by CRAs to evaluate CRTs. Some policy initiatives are finally suggested to restore market confidence in ratings and reduce the analyzed biases.

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    File URL: http://mpra.ub.uni-muenchen.de/48159/
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    File URL: http://mpra.ub.uni-muenchen.de/48196/
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    Bibliographic Info

    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 48159.

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    Date of creation: 14 Dec 2012
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    Handle: RePEc:pra:mprapa:48159

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    Related research

    Keywords: credit rating agencies; regulation; reputation; reputational games;

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    1. Beatriz Mariano, 2008. "Do Reputational Concerns Lead to Reliable Ratings?," FMG Discussion Papers dp613, Financial Markets Group.
    2. Chemmanur, Thomas J & Fulghieri, Paolo, 1994. " Investment Bank Reputation, Information Production, and Financial Intermediation," Journal of Finance, American Finance Association, vol. 49(1), pages 57-79, March.
    3. V. Crawford & J. Sobel, 2010. "Strategic Information Transmission," Levine's Working Paper Archive 544, David K. Levine.
    4. Mathis, Jérôme & McAndrews, James & Rochet, Jean-Charles, 2009. "Rating the raters: Are reputation concerns powerful enough to discipline rating agencies?," Journal of Monetary Economics, Elsevier, vol. 56(5), pages 657-674, July.
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