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Credit Ratings Failures and Policy Options

Marco Pagano and Paolo Volpin

CSEF Working Papers from Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy

Abstract: This paper examines the role of credit rating agencies in the subprime crisis that triggered the 2007-08 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 “rating shopping”, and prescribe a more complete format for the information that rating agencies must disseminate.

Keywords: credit rating agencies; securitization; default; liquidity; crisis; transparency (search for similar items in EconPapers)
JEL-codes: D82 G18 G21 (search for similar items in EconPapers)
Date: 2009-11-06
New Economics Papers: this item is included in nep-ure
References: Add references at CitEc
Citations: View citations in EconPapers (8)

Published in Economic Policy, 401-431, April 2010

Downloads: (external link)
http://www.csef.it/WP/wp239.pdf (application/pdf)

Related works:
Journal Article: Credit ratings failures and policy options (2010) Downloads
Working Paper: Credit Ratings Failures and Policy Options (2009) Downloads
Working Paper: Credit Ratings Failures and Policy Options (2009) Downloads
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