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Credit Ratings Failures and Policy Options

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Abstract

This paper examines the role of credit rating agencies in the subprime crisis, which was at the outset of the 2007-08 financial turmoil. The focus of the paper is on two aspects of ratings that contributed to the boom and bust of the market for asset-backed securities: rating inflation and coarse information disclosure. The paper discusses how regulation can be designed to mitigate these problems in the future. The suggestion is that regulators should require rating agencies to be paid by investors rather than by issuers (or at least constrain the way they are paid by issuers) and force greater disclosure of information about the underlying pool of securities.

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Paper provided by Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number 239.

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Date of creation: 06 Nov 2009
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Publication status: published in Economic Policy, 401-431, April 2010
Handle: RePEc:sef:csefwp:239

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Keywords: credit rating agencies; securitization; default; liquidity; crisis; transparency;

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Cited by:
  1. Baghai, Ramin & Servaes, Henri & Tamayo, Ane, 2011. "Have Rating Agencies Become More Conservative? Implications for Capital Structure and Debt Pricing," CEPR Discussion Papers 8446, C.E.P.R. Discussion Papers.

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