Reforming the Credit Rating Industry. What more needs to be done ? by Marwan Elkhoury, October 2014

Credit rating agencies, (CRAs), were not the cause of the 2007-2008 Global Financial Crisis which began with problems in the US subprime mortgage market and engulfed financial markets globally but their failures to properly assess financial debt instruments have contributed and exacerbated the 2007-2008 financial crisis and highlighted the need for additional reforms. They failed to appreciate the risks inherent in more complicated financial instruments (especially structured financial products backed by risky subprime mortgages), issuing incorrect ratings that proved, later on, to be disastrous to the financial system.  Beyond the consensus that there is a need for reform, divergence of views exist between, on the one hand, international and national regulatory institutions and on the other hand, academics and scholars, on the type of reforms that are needed.
The current debate of reforms of CRAs is divided between two extremes, those who want to (i) subject CRAs to tighter regulation to purge conflicts of interest; and those who believe that (ii) downsizing CRAs and deregulating them will solve the current market failures such as conflicts of interests, lack of transparency and competition, lack of accountability and over-reliance on ratings. There may be a need for both types of reforms.
More on this paper in the attached paper.

 

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