How to Save the Rating Agencies

Abstract

Rating agency repute is at an all-time low following the subprime meltdown of the summer of 2007. Because of the important role of ratings throughout the world's financial markets, many ideas have been bandied about to improve the agencies and their ratings. In this article, the authors give their own prescription based on their understanding of how the rating agencies got into their current predicament. They propose that financial market regulators take an active role, not in rating agency regulation, but in rating agency selection. They argue that regulators are the only party in the financial markets unambiguously desirous of conservative, accurate ratings.

TOPICS: Exchanges/markets/clearinghouses, legal and regulatory issues for structured finance