Proposed Reform of the Rating Agency Compensation Model

While there is little disagreement that rating agencies contributed to the financial crisis, the barrage of resulting regulations across the world has yet to address the rating agency compensation model. The authors believe the dominant issuer-pay compensation model, with its inherent conflicts of i...

Full description

Saved in:
Bibliographic Details
Published in:The journal of structured finance 2012-04, Vol.18 (1), p.71
Main Authors: Kotecha, Mahesh, Ryan, Sharon, Weinberger, Roy, DiGiacomo, Michael
Format: Article
Language:English
Subjects:
Compensation
Conflicts of interest
Rating services
Ratings & rankings
Reforms
Regulation of financial institutions
Regulatory reform
Wall Street Reform & Consumer Protection Act 2010-US
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:While there is little disagreement that rating agencies contributed to the financial crisis, the barrage of resulting regulations across the world has yet to address the rating agency compensation model. The authors believe the dominant issuer-pay compensation model, with its inherent conflicts of interests, needs to change, at least for structured financings. Regulators, not only because the industry will resist change, but also because such reform is not easy, have ducked reform of rating agency compensation. The authors propose to replace the dominant issuer-pay model with an issuer-and-investor-pay model that squarely addresses the conflicts of interests. This article describes how the new issuer-and-investor-pay model might work, including the kind of legislation that such a change would require and how it might be implemented. [PUBLICATION ABSTRACT]
ISSN:1551-9783
2374-1325
DOI:10.3905/jsf.2012.18.1.071