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VoxEU, CEPR Policy Portal

Credit Ratings and Structured Finance

Popular Science
Josephson, Jens and Joel Shapiro (2019). “Credit Ratings and Structured Finance”., CEPR Policy Portal, April 9.

Jens Josephson, Joel Shapiro

The poor performance of credit ratings of structured finance products in the financial crisis has prompted investigation into the role of credit rating agencies. This column discusses the incidence of rating inflation when such an agency both designs and rates securities, highlighting the role of demand from investors that face rating constraints, such as banks, pension funds, or insurance companies. It finds that ratings are accurate when these constraints are very tight or very lax, but inflated otherwise.