Alternatives for issuer-paid credit rating agencies

Arbeitspapier

This paper investigates the economic viability and welfare contribution of alternatives to issuer-paid credit rating agencies (CRAs). To this end, it introduces a heterogeneous competition model for credit and ratings markets. Frictions among issuers or investors induce rating inflation from issuer-paid CRAs. Investor-paid CRAs suffer from three sources of free-riding and are generally not economically viable when competing with issuer-paid CRAs. Only for very limited parameter ranges can investor-paid CRAs thrive and counter rating inflation. Other proposed alternatives such as investor-produced ratings and CRA co-investments employ skin-in-the-game to induce proper screening accuracy. However, as traditional issuer-paid CRAs can cater better to issuers, such alternatives generate little demand or are implemented ineffectively. Hence, this paper provides an explanation for the evolution, dominance and resiliency of issuer-paid CRAs.

Object Details

• ISBN: 978-92-899-1111-5
• Language: Englisch

References and Relationships

• Bibliographic citation: Series: ECB Working Paper ; No. 1703

Classification and Topics

• Classification: Wirtschaft ; Investment Banking; Venture Capital; Brokerage; Ratings and Ratings Agencies ; Financial Institutions and Services: Government Policy and Regulation ; Transactional Relationships; Contracts and Reputation; Networks
• Subject: competition ; credit rating agencies ; regulation ; reputation

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Bongaerts, Dion
• Event: Veröffentlichung
• (who): European Central Bank (ECB)
• (where): Frankfurt a. M.
• (when): 2014

Further information

• Handle: http://hdl.handle.net/10419/154136
• Last update: 10.03.2025, 11:42 AM CET