Rating the Raters
Credit rating agencies play a crucial role in modern capital markets, but they completely failed in the years preceding the financial crisis. And the problem hasn’t gone away: as long as issuers of securities choose and compensate the firms that rate them, the agencies will have a strong incentive to reciprocate with good ratings – unless they, too, are subject to ratings.
CAMBRIDGE – In the new financial order being put in place by regulators around the world, reform of credit rating agencies should be a key element. Credit rating agencies, which play an important role in modern capital markets, completely failed in the years preceding the financial crisis. What is needed is an effective mechanism for rating the raters.