Credit Ratings Failures and Policy Options
31 Pages Posted: 11 Jan 2010
Date Written: November 2009
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.
Keywords: credit rating agencies, crisis, default, liquidity, securitization, transparenccy
JEL Classification: D82, G18, G21
Suggested Citation: Suggested Citation