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The Quality of Credit Ratings. A Two-Sided Market Perspective

Listed author(s):
  • Jorge Ponce

    ()

    (Toulouse School of Economics (Gremaq)
    Banco Central del Uruguay)

This paper presents a formal model of a credit rating agency. I study the consequences of the transition from an “investor-pays” model to an “issuer-pays” model on the quality standard of credit ratings chosen by the agency. I find that such a transition is likely to generate a degradation of the quality standard, which may fall below the socially efficient level. I discuss empirical implications and several reform proposals to the business model of credit rating agencies.

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File URL: http://www.bcu.gub.uy/Estadisticas-e-Indicadores/Documentos%20de%20Trabajo/2.2009.pdf
File Function: Preliminary version, 2010
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Paper provided by Banco Central del Uruguay in its series Documentos de trabajo with number 2009002.

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Length: 26 pages
Date of creation: 2009
Date of revision: 24 Feb 2010
Handle: RePEc:bku:doctra:2009002
Contact details of provider: Postal:
Biblioteca Especializada. Banco Central del Uruguay. Diagonal Fabini 777, Montevideo-Uruguay. CP 11100

Phone: +598 1967
Web page: http://www.bcu.gub.uy
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  1. Mathis, Jérôme & McAndrews, James & Rochet, Jean-Charles, 2009. "Rating the raters: Are reputation concerns powerful enough to discipline rating agencies?," Journal of Monetary Economics, Elsevier, vol. 56(5), pages 657-674, July.
  2. Doh-Shin Jeon & Jean-Charles Rochet, 2010. "The Pricing of Academic Journals: A Two-Sided Market Perspective," American Economic Journal: Microeconomics, American Economic Association, vol. 2(2), pages 222-255, May.
  3. Perotti, Enrico C. & Suarez, Javier, 2002. "Last bank standing: What do I gain if you fail?," European Economic Review, Elsevier, vol. 46(9), pages 1599-1622, October.
  4. Patrick Bolton & Xavier Freixas & Joel Shapiro, 2012. "The Credit Ratings Game," Journal of Finance, American Finance Association, vol. 67(1), pages 85-112, 02.
  5. Forster, Josef, 2008. "The Optimal Regulation of Credit Rating Agencies," Discussion Papers in Economics 5169, University of Munich, Department of Economics.
  6. Jean‐Charles Rochet & Jean Tirole, 2006. "Two‐sided markets: a progress report," RAND Journal of Economics, RAND Corporation, vol. 37(3), pages 645-667, 09.
  7. Felton, Andrew & Reinhart, Carmen M. (ed.), 2009. "The First Global Financial Crisis of the 21st Century Part II: June–December, 2008," Vox eBooks, Centre for Economic Policy Research, number p199, December.
  8. Jean-Charles Rochet & Jean Tirole, 2014. "Platform Competition in Two-Sided Markets," CPI Journal, Competition Policy International, vol. 10.
  9. Becker, Bo & Milbourn, Todd, 2011. "How did increased competition affect credit ratings?," Journal of Financial Economics, Elsevier, vol. 101(3), pages 493-514, September.
  10. Skreta, Vasiliki & Veldkamp, Laura, 2009. "Ratings shopping and asset complexity: A theory of ratings inflation," Journal of Monetary Economics, Elsevier, vol. 56(5), pages 678-695, July.
  11. Richard Johnson, 2003. "An examination of rating agencies' actions around the investment-grade boundary," Research Working Paper RWP 03-01, Federal Reserve Bank of Kansas City.
  12. Beaver, William H. & Shakespeare, Catherine & Soliman, Mark T., 2006. "Differential properties in the ratings of certified versus non-certified bond-rating agencies," Journal of Accounting and Economics, Elsevier, vol. 42(3), pages 303-334, December.
  13. Stolper, Anno, 2009. "Regulation of credit rating agencies," Journal of Banking & Finance, Elsevier, vol. 33(7), pages 1266-1273, July.
  14. Richard Cantor & Frank Packer, 1994. "The credit rating industry," Quarterly Review, Federal Reserve Bank of New York, issue Sum, pages 1-26.
  15. repec:rje:randje:v:37:y:2006:3:p:645-667 is not listed on IDEAS
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