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The financial crisis and the credit rating agencies: the failure of reputation

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  • Miele, Maria Grazia

Abstract

This paper presents a theoretical framework to describe the behaviour of the credit rating agencies(CRAs) during the crisis, surveying some reputational game models. CRAs have been blamed of inflating ratings of the new credit risk transfer products (CRTs) and of acting in favour of issuers instead of investors. This paper addresses three key elements to explain CRAs conduct: misaligned incentives – also favoured by the increasing reliance on ratings - the oligopolistic structure of the ratings’ industry and the inadequacy of the credit risk models used by CRAs to evaluate CRTs. Some policy initiatives are finally suggested to restore market confidence in ratings and reduce the analyzed biases.

Suggested Citation

  • Miele, Maria Grazia, 2012. "The financial crisis and the credit rating agencies: the failure of reputation," MPRA Paper 48159, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:48159
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    File URL: https://mpra.ub.uni-muenchen.de/48196/9/MPRA_paper_48196.pdf
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    References listed on IDEAS

    as
    1. Mathis, Jérôme & McAndrews, James & Rochet, Jean-Charles, 2009. "Rating the raters: Are reputation concerns powerful enough to discipline rating agencies?," Journal of Monetary Economics, Elsevier, vol. 56(5), pages 657-674, July.
    2. Beatriz Mariano, 2008. "Do Reputational Concerns Lead to Reliable Ratings?," FMG Discussion Papers dp613, Financial Markets Group.
    3. Crawford, Vincent P & Sobel, Joel, 1982. "Strategic Information Transmission," Econometrica, Econometric Society, vol. 50(6), pages 1431-1451, November.
    4. Chemmanur, Thomas J & Fulghieri, Paolo, 1994. "Investment Bank Reputation, Information Production, and Financial Intermediation," Journal of Finance, American Finance Association, vol. 49(1), pages 57-79, March.
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    Cited by:

    1. Wasi, Md Abdul & Pham, Thu Phuong & Zurbruegg, Ralf, 2021. "The non-pecuniary determinants of sovereign and bank rating changes," Finance Research Letters, Elsevier, vol. 41(C).

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    More about this item

    Keywords

    credit rating agencies; regulation; reputation; reputational games;
    All these keywords.

    JEL classification:

    • G0 - Financial Economics - - General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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