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Credit ratings failures and policy options

  • Marco Pagano
  • Paolo Volpin

"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.

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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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Article provided by CEPR & CES & MSH in its journal Economic Policy.

Volume (Year): 25 (2010)
Issue (Month): (04)
Pages: 401-431

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Handle: RePEc:bla:ecpoli:v:25:y:2010:i::p:401-431
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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, 2010. "The Credit Ratings Game," Working Papers 468, Barcelona Graduate School of Economics.
  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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