Monday, June 22, 2009

Credit rating agencies

This posting is triggered by the article on "Lessons from the financial crises" by Arun Duggal in ET today. In order to regulate credit rating agencies, he argues that they must be made to hold 10% of the paper they rate till their maturity.

The problem with this suggestion is that this will require huge infusion of capital by credit raters. An essentially non-fund based business will become a fund-based activity.

Instead, in order to make them more accountable, in case more than say 5% of issues rated as investment-grade end up in default within a year, the agencies must be disgorged of fees received from such issuers.

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