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Alternatives for Issuer-Paid Credit Rating Agencies
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Alternatives for Issuer-Paid Credit Rating Agencies

Dion Bongaerts
ECB, 2014
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Editorial Rating

8

Qualities

  • Analytical
  • Innovative

Recommendation

Imagine paying someone to rate you and then expecting their evaluation to be entirely objective. As inane as it sounds, that’s the current setup between issuers and the credit rating agencies that assign those all-important letter grades to structured securities. There ought to be a better way, but – as economist Dion Bongaerts points out in his erudite analysis – alternatives may not be as cost-effective or competitive as the existing issuer-paid system. getAbstract recommends this seminal report to investors, issuers and analysts involved in assessing securities risk.

Summary

After the 2007–2009 subprime crisis, the effectiveness and objectivity of credit rating agencies (CRAs) such as Standard & Poor’s, Moody’s and Fitch came into question when some highly rated debt securities collapsed, leaving investors with massive losses. According to the International Monetary Fund, investors in structured products such as subprime mortgage-backed securities lost some $3.4 trillion, even though most of the securities carried AAA grades. Had these securities received ratings that correctly reflected their risk, investors might have avoided at least some of these losses. Yet the default of highly rated securities...

About the Author

Dion Bongaerts is an associate professor of finance at Erasmus University’s Rotterdam School of Management.

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