Incentivizing Credit Rating Agencies under the Issuer Pay Model Through a Mandatory Compensation Competition

摘要

Credit rating agencies suffer from a lack of competition and will to perform better than other agencies, which diminishes the quality of credit ratings. If competition in fact does not exist, regulation should induce it. Large numbers of competitors are not needed to achieve robust, positive competition. Contrary to accepted wisdom, an industry of three firms can be competitive under the right conditions. The condition for competition is created when a portion of compensation is redirected from consideration for services rendered to pay for performance. A mandatory winner-take-all bonus scheme can augment the issuer-pay model. This modest, at-the-margin change can create the necessary conditions for robust, positive competition.