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Credit Ratings Failures and Policy Options

  • Marco Pagano

    (Università di Napoli "Federico II", CSEF, EIEF and CEPR)

  • Paolo Volpin

    (London Business School and CEPR)

This paper examines the role of credit rating agencies in the subprime crisis that triggered the 2007-08 financial turmoil. The focus of the paper is on two aspects of ratings that contributed to the boom and bust of the market for asset-backed securities:rating inflation and coarse information disclosure. The paper discusses how regulation can be designed to mitigate these problems in the future. The suggestion is that regulators should require rating agencies to be paid by investors rather than by issuers (or at least constrain the way they are paid by issuers) and force greater disclosure of information about the underlying pool of securities.

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File URL: http://www.eief.it/files/2012/09/wp-12-credit-ratings-failures-and-policy-options.pdf
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Paper provided by Einaudi Institute for Economics and Finance (EIEF) in its series EIEF Working Papers Series with number 0912.

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Length: 29 pages
Date of creation: 2009
Date of revision: Sep 2009
Handle: RePEc:eie:wpaper:0912
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  1. Patrick Bolton & Xavier Freixas & Joel Shapiro, 2010. "The Credit Ratings Game," Working Papers 468, Barcelona Graduate School of Economics.
  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, MIT Press, vol. 125(1), pages 307-362, February.
  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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