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Credit Ratings Failures and Policy Options

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This paper examines the role of credit rating agencies in the subprime crisis that triggered the 2007-08 financial turmoil. We focus on two aspects of ratings that contributed to the boom and bust of the market for structured debt: rating inflation and coarse information disclosure. The paper discusses how regulation can be designed to mitigate these problems in the future. Our preferred policy is to require rating agencies to be paid by investors rather than by issuers and to grant open and free access to data about the loans or securities underlying structured debt products. A more modest (but less effective) approach would be to retain the “issuer pays” model but require issuers to pay an upfront fee irrespective of the rating, ban “rating shopping”, and prescribe a more complete format for the information that rating agencies must disseminate.

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Bibliographic Info

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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  1. Bo Becker & Todd Milbourn, 2008. "Reputation and competition: evidence from the credit rating industry," Harvard Business School Working Papers 09-051, Harvard Business School, revised Sep 2010.
  2. Patrick Bolton & Xavier Freixas & Joel Shapiro, 2009. "The credit ratings game," Economics Working Papers 1149, Department of Economics and Business, Universitat Pompeu Fabra.
  3. Benjamin J. Keys & Tanmoy Mukherjee & Amit Seru & Vikrant Vig, 2010. "Did Securitization Lead to Lax Screening? Evidence from Subprime Loans," The Quarterly Journal of Economics, MIT Press, vol. 125(1), pages 307-362, February.
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Cited by:
  1. Jeon, Doh-Shin & Lovo, Stefano, 2013. "Credit rating industry: A helicopter tour of stylized facts and recent theories," International Journal of Industrial Organization, Elsevier, vol. 31(5), pages 643-651.
  2. Kero, Afroditi, 2013. "Banks’ risk taking, financial innovation and macroeconomic risk," The Quarterly Review of Economics and Finance, Elsevier, vol. 53(2), pages 112-124.
  3. Harald Hau & Sam Langfield & David Marques-Ibanez, 2012. "Bank ratings-What determines their quality?," Working Papers 12012, Bangor Business School, Prifysgol Bangor University (Cymru / Wales).
  4. Matthias Efing, 2013. "Bank Capital Regulation with an Opportunistic Rating Agency," CESifo Working Paper Series 4267, CESifo Group Munich.
  5. Aggelos KOTIOS & George GALANOS & Spyros ROUKANAS, 2012. "The Rating Agencies In The International Political Economy," Scientific Bulletin - Economic Sciences, University of Pitesti, vol. 11(1), pages 3-15.
  6. Lützenkirchen, Kristina & Rösch, Daniel & Scheule, Harald, 2013. "Ratings based capital adequacy for securitizations," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 5236-5247.
  7. Eberl, Jakob & Jus, Darko, 2012. "The year of the cat: Taxing nuclear risk with the help of capital markets," Energy Policy, Elsevier, vol. 51(C), pages 364-373.
  8. Giovanni Ferri & Andrea Morone, 2014. "The effect of rating agencies on herd behaviour," Journal of Economic Interaction and Coordination, Springer, vol. 9(1), pages 107-127, April.
  9. 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.
  10. Chiwitt, Ulrich, 2014. "Ratingagenturen - Fluch oder Segen? Eine kritische Bestandsaufnahme," Arbeitspapiere der FOM 48, FOM Hochschule für Oekonomie & Management.

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