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Credit ratings failures and policy options

Author

Listed:
  • Marco Pagano
  • Paolo Volpin

Abstract

"This paper examines the role of credit rating agencies in the subprime crisis that triggered the 2007-2008 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 'credit shopping', and prescribe a more complete format for the information that rating agencies must disseminate." Copyright (c) CEPR, CES, MSH, 2010.

Suggested Citation

  • Marco Pagano & Paolo Volpin, 2010. "Credit ratings failures and policy options," Economic Policy, CEPR;CES;MSH, vol. 25, pages 401-431, April.
  • Handle: RePEc:bla:ecpoli:v:25:y:2010:i::p:401-431
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    File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1468-0327.2010.00245.x
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    References listed on IDEAS

    as
    1. Patrick Bolton & Xavier Freixas & Joel Shapiro, 2012. "The Credit Ratings Game," Journal of Finance, American Finance Association, vol. 67(1), pages 85-112, February.
    2. 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, Oxford University Press, vol. 125(1), pages 307-362.
    3. 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.
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    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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