Let’s assume that there is only one rating agency with a monopoly – by the logic of those who argue for the centralised clearing platform, this should mitigate the problem of competition amongst agencies leading to more lenient ratings. And this is true of corporate bonds where in most cases, the rating being worse than expected does not prevent the corporate from going ahead and issuing the bond. But this is not true in structured products where if the agency does not rate a product AAA, it just does not get issued/come into existence. So the agency is still incentivised to give lenient ratings because the volume of total bonds that are issued is critically dependent on its ratings methodology being lenient.

as i conclude above “even if there was just one monopolistic rating agency that was paid by the regulator, the agency would have been almost as aggressive in rating new structures just because of the indisputable fact that the agency got paid only when a deal got done, and lenient ratings standards got more deals done.”

“The critical assumption behind the idea of a centralised clearing platform is that the total notional of bonds that exist and need to be rated is constant i.e. it assumes that the actions of the ratings agencies only divide up the ratings market and do not expand or contract it.”

Why does A (centralised clearing platform) assume B (constant total notional) – you lost me there, and I don’t see where you make it clear in the article as to why you think this relationship exists.

More broadly, the answer to the ratings agencies to me, seems rather obvious – the buy-side, who is properly incentivized to provide accurate ratings should pay for the ratings. This, of course, will make transparent price discovery very challenging (firm A rates Bond X as AAA, firm B rates Bond X as AAB). But how can we create any system that doesn’t create incentives to rate the bonds higher than they should be? I’d be interested in to hear what you view as possible solutions.

Even if there were no rating agencies, this could have happened. Boom and bust cycles are common in credit.