The European rating fund

Abstract

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/methodology/approach

The design is based on the market deficiencies and structural issues defined by numerous other 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 products for ratings gets anonymized and randomized, which eliminates most conflicts of interest that prevent the market players from performing as they should. This process changes the market fundamentally, but it does not impact either side’s capacity to make profit.

Research limitations/implications

The concept can hence solve most issues of the market, but not all.

Practical implications

The concept is a first step toward necessary reform, and this paper fuels a new discussion about a valid CRA market reform. The reform proposal mentioned in this paper focuses on the European Union, but the structure is easily adaptable to other markets.

Originality/value

The structure introduced in this paper is a new concept that has not been proposed before.

Citation

Fischer, D.-H. (2018), "The European rating fund", Journal of Financial Regulation and Compliance, Vol. 26 No. 1, pp. 72-86. https://doi.org/10.1108/JFRC-12-2016-0107