The financial crisis and the credit rating agencies: the failure of reputation
This paper presents a theoretical framework to describe the behaviour of the credit rating agencies(CRAs) during the crisis, surveying some reputational game models. CRAs have been blamed of inflating ratings of the new credit risk transfer products (CRTs) and of acting in favour of issuers instead of investors. This paper addresses three key elements to explain CRAs conduct: misaligned incentives – also favoured by the increasing reliance on ratings - the oligopolistic structure of the ratings’ industry and the inadequacy of the credit risk models used by CRAs to evaluate CRTs. Some policy initiatives are finally suggested to restore market confidence in ratings and reduce the analyzed biases.
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FMG Discussion Papers
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- Beatriz Mariano, 2008. "Do reputational concerns lead to reliable ratings?," LSE Research Online Documents on Economics 24433, London School of Economics and Political Science, LSE Library.
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