Functions and Malfunctions of the Rating Industry

Abstract

In order to address the question of how to improve the quality of ratings, we need to have a clear understanding of the objectives and functions served by the industry’s firms and their products. This chapter provides that clarification and, by doing so, isolates the problems or malfunctions that are attributed to the industry. Some problems are recent, others have been around a while but have not yet found adequate resolutions. Further, how are these malfunctions thought to impede the process of capital accumulation? Are there particular circumstances in which the ability of ratings to perform their functions wanes or in which malfunctions are more apt to occur? And, if so, why. The chapter also provides a brief look at how governments have approached regulation and oversight of this industry, leaving a more detailed examination to chapter 5 (regulatory capture).