The European rating fund

Author:Dirk-Hinnerk Fischer
Position:Tallinna Tehnikaulikool, Tallinn, Estonia
Pages:72-86
SUMMARY

Purpose The complexity of the financial markets and their controlling entities make structural reforms highly problematic and controversial. This paper aims to address the deficiencies of the credit rating agency (CRA) market. The contribution of this paper to this long and ongoing discussion is a reform concept that is based on the introduction of a new public entity. Design/methodolo... (see full summary)

 
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The European rating fund
Dirk-Hinnerk Fischer
Tallinna Tehnikaulikool, Tallinn, Estonia
Abstract
Purpose The complexity of the nancial markets and their controlling entities make structural reforms
highly problematic andcontroversial. This paper aims to address the decienciesof the credit rating agency
(CRA) market. The contributionof this paper to this long and ongoing discussion is a reform concept thatis
based on the introductionof a new public entity.
Design/methodology/approach The design is based on the market deciencies and structuralissues
dened by numerousother researchers.
Findings The proposed market reform is based on the introduction of an entity that mainly acts as a
communication layer which takes over the contract distribution and payment organization between the
issuers and the agencies. The distribution of productsfor ratings gets anonymized and randomized, which
eliminates most conicts of interest thatprevent the market players from performing as they should. This
process changesthe market fundamentally, but it does not impact either sides capacityto make prot.
Research limitations/implications The concept can hence solvemost issues of the market, but not
all.
Practical implications The concept is a rst step toward necessaryreform, and this paper fuels a new
discussion about a valid CRA market reform. The reform proposal mentioned in this paper focuses on the
EuropeanUnion, but the structure is easily adaptable to other markets.
Originality/value The structure introduced in thispaper is a new concept that has not been proposed
before.
Keywords Credit ratings, Financial regulation, Credit rating agency, Financial institutions,
Financial market, Financial reform
Paper type Conceptual paper
1. Introduction
The market for credit ratings is a highly controversial topic. Numerous problems with
conicting interestsand unsatisfactory performances are documented. Thoroughreforms of
the markets have not really been implemented. Moreover, most of the solutions proposed in
the academic debate have aws, as these do not sufciently address some of the crucial
conicts of interest that pesterthis market.
This paper proposes a new distribution and administration systemfor the rating agency
market. The model focuses on the European Union (EU) but it is easily adaptable to other
parts of the world as well. The European Rating Fund (ERF) is a simply designed
communication and distribution platform that eliminates the rating agenciesconicts of
interest. The objectiveof the ERF is to enable the rating agencies to perform more accurately
in regard to nancialmarket risk assessment.
This paper introduces the ERF as one possible design for a completely new supervisory
entity that provides a protective layer for the rating agencies and a payment pool for the
issuers, without creating high costs or time-consuming bureaucracy. The ERF mediates
between companies issuing nancial market products and rating agencies. It uses a
JEL classication G18, G15, F39
JFRC
26,1
72
Received11 December 2016
Revised27 February 2017
Accepted18 April 2017
Journalof Financial Regulation
andCompliance
Vol.26 No. 1, 2018
pp. 72-86
© Emerald Publishing Limited
1358-1988
DOI 10.1108/JFRC-12-2016-0107
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1358-1988.htm

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