Costs of the Municipal Bond Rating System

22 Pages Posted: 26 Oct 2016  

Marc D. Joffe

Public Sector Credit Solutions

Date Written: October 24, 2016

Abstract

I estimate that the contemporary system of municipal bond ratings costs issuers over $2 billion annually. Fees paid to rating agencies directly account for about $500 million of this total. The greater burden on issuers arises from the relatively harsh ratings that agencies assign municipal bonds viz.-a-viz. other instruments. These costs take the form of additional interest paid to investors and purchases of municipal bond insurance intended to reduce this interest burden. Since defaults by rated municipal bond issuers are so rare, and since defaulting issuers can usually be identified ahead of time by accounting ratios and economic indicators, I conclude that significant cost savings are possible by replacing the current rating system with model-based assessments that yield higher ratings overall while still differentiating at-risk issuers.

Keywords: municipal bonds, ratings

JEL Classification: G12, G24, H81

Suggested Citation

Joffe, Marc D., Costs of the Municipal Bond Rating System (October 24, 2016). Available at SSRN: https://ssrn.com/abstract=2858674

Marc D. Joffe (Contact Author)

Public Sector Credit Solutions ( email )

1655 N. California Blvd.
Suite 223
Walnut Creek, CA 94596
United States
14155780558 (Phone)

HOME PAGE: http://www.publicsectorcredit.org

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