How to Reform the Credit-Rating Process to Support a Sustainable Revival of Private-Label Securitization

Richard Herring () and Edward Kane
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Richard Herring: The Wharton School, University of Pennsylvania, 2444 Steinberg-Dietrich Hall, 3620 Locust Walk, Philadelphia, PA 19104, USA

Quarterly Journal of Finance (QJF), 2012, vol. 02, issue 01, 1-25

Abstract: US product-liability laws unwisely treat credit-rating organizations (CROs) as if they produce opinions rather than empirically-based economic research. In principle, trained professionals gather time-varying information ("financial news") and analyze it statistically to reduce it to a single dimension, allegedly for the benefit of investors, which, in turn, enables issuers to finance themselves at lower cost. In practice, the issuer-pays business model currently used for funding the production and distribution of ratings information creates an incentive to favor high-volume issuers by over-rating private-label securitizations. While the Dodd–Frank Act intensifies SEC oversight of CRO activity, the SEC has a history of being captured by regulatory clients. We argue that the fundamental solution is to create accountability in the ratings process so that private label securitizations can play a constructive role in the provision of credit and we go on to offer some conjectures about how this could be done.

Keywords: Credit ratings; credit rating regulation; credit risk; securitization (search for similar items in EconPapers)
Date: 2012
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DOI: 10.1142/S2010139212500024

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