Jens Josephson, Joel Shapiro, 09 April 2019

The poor performance of credit ratings of structured finance products in the financial crisis has prompted investigation into the role of credit rating agencies. This column discusses the incidence of rating inflation when such an agency both designs and rates securities, highlighting the role of demand from investors that face rating constraints, such as banks, pension funds, or insurance companies. It finds that ratings are accurate when these constraints are very tight or very lax, but inflated otherwise.

Philippe Karam, Ouarda Merrouche, Moez Souissi, Rima Turk, 02 February 2015

In the wake of the Crisis, policymakers have introduced liquidity regulation to promote the resilience of banks and lower the social cost of crisis management. This column shows that a funding liquidity shock, manifested as lower access to wholesale sources of funding following a credit rating downgrade, translates into a significant decline in both domestic and foreign lending. Liquidity self-insurance by banks mitigates the impact of a credit rating downgrade on lending.

Harold Cole, Thomas Cooley, 22 June 2014

In the aftermath of the sub-prime crisis, the major credit rating agencies have been criticised for giving overly generous ratings to mortgage-backed securities. Whereas many commentators have blamed the ‘issuer pays’ market structure for distorting incentives, this column argues that the key distortion came from regulators’ use of private ratings to assign risk weights. This induced investors to focus on the risk weights attached to ratings rather than their information content, thus undermining the reputation mechanism that had previously kept ratings honest.

Helmut Reisen, 19 May 2010

Credit rating agencies have recently downgraded Greek, Portuguese, and Spanish sovereign debt, causing unrest among Europe’s leaders. This column argues that unless sovereign ratings can be turned into proper early warning systems, they will continue to increase instability and volatility and to undermine the benefits of capital markets. One option is to drop the use of sovereign ratings in prudential regulation altogether.

Amadou Sy, 25 July 2009

Current efforts to regulate credit rating agencies focus on micro-prudential issues and aim at reducing conflicts of interest and increasing transparency and competition. Yet, the current crisis has shown that credit ratings can have systemic effects. This column says that policymakers should assess how credit ratings downgrades can endanger financial stability and take appropriate macro-prudential measures.

Charles Goodhart, 05 December 2008

Credit rating agencies were at the heart of the rise of securitisation, and securitised assets were at the heart of the Subprime problems. Plainly these agencies are slated for major reforms. This column presents the statement of an eminent group of financial economists on such reform.

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