What can be done about the credit rating problem

Credit rating agencies are in the spotlight for all the wrong reasons, again. Perhaps, one can say, the mutual fund industry has got the credit rating agencies it deserves. White’s suggestion is one among other proposals that seek to deal with the glaring conflict of interest in the ‘issuer pays’ model, where an issuer of debt securities also pays for the credit rating. In their book soon after the 2008 financial crisis, Restoring Financial Stability: How to Repair a Failed System, they suggested regulators create a centralized clearing platform for rating agencies. Acharya and Richardson argued that this takes care of both the free-riding problem of the ‘investor pays’ model, and the rating shopping problem of the ‘issuer pays’ model.