Credit ratings failures and policy options

Cash-in-the-market pricing and optimal resolution of bank failures

Marco Pagano and Paolo Volpin

Economic Policy, 2010, vol. 25, issue 62, 401-431

Abstract: This paper examines the role of credit rating agencies in the subprime crisis that triggered the 2007–2008 financial turmoil. We focus on two aspects of ratings that contributed to the boom and bust of the market for structured debt: rating inflation and coarse information disclosure. The paper discusses how regulation can be designed to mitigate these problems in the future. Our preferred policy is to require rating agencies to be paid by investors rather than by issuers and to grant open and free access to data about the loans or securities underlying structured debt products. A more modest (but less effective) approach would be to retain the ‘issuer pays’ model but require issuers to pay an upfront fee irrespective of the rating, ban ‘credit shopping’, and prescribe a more complete format for the information that rating agencies must disseminate.— Marco Pagano and Paolo Volpin

Date: 2010
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Related works:
Working Paper: Credit Ratings Failures and Policy Options (2009)
Working Paper: Credit Ratings Failures and Policy Options (2009)
Working Paper: Credit Ratings Failures and Policy Options (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:oup:ecpoli:v:25:y:2010:i:62:p:401-431.

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