Rating agencies in the face of regulation
نویسندگان
چکیده
Massive downgrading and defaults during the 2008/2009 financial crisis have led politicians, regulators, and the popular press to conclude that the rating agencies’ business model is fundamentally flawed. The popular argument goes as follows. Issuers of securities naturally prefer higher ratings for their issues, because these reduce their cost of capital. Because the issuer pays the rating agency to provide a rating, rating agencies can capture some or all of the benefit to the issuer of providing high ratings. This results in “huge conflicts of interest” (Krugman, NYT 2010) between rating agencies and investors, because rating agencies have an incentive to inflate their ratings relative to the information available.
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