This paper proposes a newly designed distribution and administration system for the rating agency market. The model focuses on the European Union, but it is easily adaptable to other parts of the world. The European Rating Fund (ERF) is a simply designed communication and distribution platform that eliminates the conflicts of interest for the rating agencies. Its objective is to enable the rating agencies to perform more accurately in regard to financial market crisis prediction. The controversial performance of the rating agencies has been subject to academic discussions over decades, however no attempt to improve the market´s performance was really successful. This theoretical introduction of the ERF is based on the work of the numerous researchers providing the necessary insides to the markets and their reasons why past attempts could not trigger changes in real world economics.
This paper introduces the ERF as one possible design for a completely new supervisory entity that provides a protective layer for the rating agencies, without creating high costs or time-consuming bureaucracy. The ERF mediates between companies issuing financial market products and the rating agencies. It introduces a randomized contract distribution, payment and communication system that prevents the conflicts created by the current structure without impacting the independence and profitability of either market. Market pressures and gaming behaviour, moral-hazard and principle-agent-problems will all be eliminated by this new and non-bureaucratic regulatory entity. This enables the rating agencies to report more precise results and to liberate them from political pressures from the markets.
The structure of the ERF will be discussed in all detail, but also some possible additional surrounding advancements for the rating agency market will be mentioned.
