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A public good approach to credit ratings – From concept to reality

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  • Duan, Jin-Chuan
  • Van Laere, Elisabeth

Abstract

From the onset of the 2008–2009 financial crisis to the subsequent European sovereign debt crisis, credit rating agencies have been assigned considerable blame. Reforming the credit rating industry has hence become an important policy issue. In addition to the regulatory efforts in the context of accepting the for-profit business model of ratings, there is a growing realization that credit ratings bear the characteristics of a public good. Financial market participants need reliable, transparent and independent assessment of credit risks. Credit ratings are therefore better viewed as an infrastructure matter. However, the proposed regulations seem to have missed this point. This paper introduces a new approach to credit ratings undertaken by the Risk Management Institute at the National University of Singapore that is predicated on the provision of credit ratings as a public good. With a public good alternative in place, the currently predominant for-profit business model may be counterbalanced.

Suggested Citation

  • Duan, Jin-Chuan & Van Laere, Elisabeth, 2012. "A public good approach to credit ratings – From concept to reality," Journal of Banking & Finance, Elsevier, vol. 36(12), pages 3239-3247.
  • Handle: RePEc:eee:jbfina:v:36:y:2012:i:12:p:3239-3247 DOI: 10.1016/j.jbankfin.2012.03.012
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Kim, Myeong Hyeon & Kim, Baeho, 2014. "Systematic cyclicality of systemic bubbles: Evidence from the U.S. commercial banking system," Journal of Macroeconomics, Elsevier, vol. 42(C), pages 281-297.
    2. Tong, Eric, 2017. "US monetary policy and global financial stability," Research in International Business and Finance, Elsevier, vol. 39(PA), pages 466-485.
    3. Sensoy, Ahmet & Eraslan, Veysel & Erturk, Mutahhar, 2016. "Do sovereign rating announcements have an impact on regional stock market co-movements? The case of Central and Eastern Europe," Economic Systems, Elsevier, vol. 40(4), pages 552-567.
    4. RMI staff article, 2016. "NUS-RMI Credit Research Initiative Technical Report Version: 2016 Update 1," Global Credit Review (GCR), World Scientific Publishing Co. Pte. Ltd., vol. 6(01), pages 49-132.
    5. repec:oup:revfin:v:21:y:2017:i:2:p:465-509. is not listed on IDEAS
    6. Tao Wang, 2016. "Time-Varying Rating Standards and the Distorted Incentives of Credit Rating Agencies," Global Credit Review (GCR), World Scientific Publishing Co. Pte. Ltd., vol. 6(01), pages 21-39.
    7. Polito, Vito & Wickens, Mike, 2014. "Modelling the U.S. sovereign credit rating," Journal of Banking & Finance, Elsevier, vol. 46(C), pages 202-218.
    8. Bławat, Bogusław, 2012. "CRI RMI - Nowy model oceny ryzyka wystąpienia trudności finansowych firm
      [CRI RMI - New Approach to Default Probability Calculation]
      ," MPRA Paper 49121, University Library of Munich, Germany, revised Jan 2013.

    More about this item

    Keywords

    Rating agencies; Financial regulation; Rating transparency; Probability of default; Forward intensity;

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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