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Why have official rating agencies failed in the past, and will they in the future?

Listed author(s):
  • Marc Piazolo

    (University of Applied Sciences Kaiserslautern, Amerikastrasse 1,Zweibruecken, Germany)

Registered author(s):

    Reforms of bank-capital rules by the Basel committee (Basel II) are due to come into force in 2007. They require bank regulators to use agencies’ ratings as a basic measure of the riskiness of a bank’s credit portfolio, or else the banks have to implement internal rating measure, which have been approved by government regulators. Ratings of the official agencies are like benchmarks in credit worthiness. We will look at two aspects of rating agencies: (1) How can deal with incentive problems like moral hazard, adverse selection based on asymmetric information and the principal agent problem? (2) Sovereign risk has been prominent in the past, especially for emerging markets. We will analyse he accuracy of official rating agencies during the Asian crisis of 1997/1998 by comparing their performance with the results of basic student country risk rankings. The forecasting quality of these ex post rankings seems to be superior to that of official ratings.

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    Article provided by Cyprus Economic Society and University of Cyprus in its journal Ekonomia.

    Volume (Year): 9 (2006)
    Issue (Month): 1 (Summer)
    Pages: 3-20

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    Handle: RePEc:ekn:ekonom:v:9:y:2006:i:1:p:3-20
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