A Template for a Public Credit Rating Agency
In the wake of the global financial crisis (GFC), there have been calls for changes in the credit ratings industry. The American and European responses were new regulation and supervision of the rating agencies' activities and resolving issues on an "as-needed" basis. Are these efforts enough? Building on the discussion in M. Ahmed Diomande, James Heintz and Robert Pollin (2009), this paper puts forth a template for a public credit ratings agency. This agency's functions include the validation of the ratings of private rating agencies and the examination of the relationship between ratings changes and the business cycle. A public credit rating agency could be split into divisions, each of which focuses on particular types of borrowers: financial firms (banks and non-bank financial institutions), non-financial firms (corporations and SMEs) and households. These divisions could liaise with relevant agencies such as, for instance, the U.S. Securities and Exchange Commission. The paper concludes by arguing that national public credit rating agencies are not enough, and there needs to be an international credit rating agency, possibly housed at the United Nations, designed to validate sovereign ratings created by private agencies.