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How, if at all, Should Credit Rating Agencies (CRAs) be Regulated?

Goodhart, C. A. E.

The role of credit ratings agencies (CRAs) is to forecast the probability that the issuer of a debt liability will default on the due repayment (its probability of default, PD). In this respect, CRAs are one of a large set of institutions and people who seek to forecast certain aspects of the future. As a generality, the only, or at any rate the most important, requisite of a forecast is its accuracy. So long as the forecast is accurate, it is largely beside the point how the forecaster behaves otherwise, whether they lead a blameless life, or alternatively are rude to their parents, beat their children or cheat on their spouses, etc. Moreover, in the case of CRAs, (unlike the Delphic oracle), the forecast is not only relatively clear in content, (though we shall consider later how it could, and should, be made even clearer), but also the status of the event being forecast, i.e. whether the issuer defaults, or not, on due repayment, is also relatively clear – and any remaining fuzziness often becomes subject to a legal decision. So the forecasting activities of CRAs should be susceptible to ex post accountability. Compare forecast with out-turn; assess and publish the comparative accuracy of the various CRAs' and leave competition to do the rest. We shall review what extra steps need to be taken to enhance such ex post accountability, comparing forecast with outcome, and comment briefly on how, perhaps, to enhance competition.

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More About This Work

Academic Units
Initiative for Policy Dialogue
Publisher
Initiative for Policy Dialogue
Series
Initiative for Policy Dialogue Working Paper Series
Published Here
April 8, 2011
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