The European rating fund
| Pages | 72-86 |
| Date | 12 February 2018 |
| DOI | https://doi.org/10.1108/JFRC-12-2016-0107 |
| Published date | 12 February 2018 |
| Author | Dirk-Hinnerk Fischer |
| Subject Matter | Accounting & Finance,Financial risk/company failure,Financial compliance/regulation |
The European rating fund
Dirk-Hinnerk Fischer
Tallinna Tehnikaulikool, Tallinn, Estonia
Abstract
Purpose –The complexity of the financial markets and their controlling entities make structural reforms
highly problematic andcontroversial. This paper aims to address the deficienciesof 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 deficiencies and structuralissues
defined 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 conflicts of interest thatprevent the market players from performing as they should. This
process changesthe market fundamentally, but it does not impact either side’s capacityto make profit.
Research limitations/implications –The concept can hence solvemost issues of the market, but not
all.
Practical implications –The concept is a first 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
conflicting 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 flaws, as these do not sufficiently address some of the crucial
conflicts 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 agencies’conflicts of
interest. The objectiveof the ERF is to enable the rating agencies to perform more accurately
in regard to financialmarket 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 financial market products and rating agencies. It uses a
JEL classification –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
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