An assessment of the effectiveness of the European Union's regulatory mechanisms to regulate credit rating agencies in the wake of the financial crisis

Abstract

In 2007 - 2009, the world was hit by a great recession where credit rating agencies have been blamed to be one of the key drivers in deepening the crisis. In response to this, the European Union pursued a set of legislations to regulate rating agencies' practices. The following study investigates whether the European Union's regulations and subsequent amendments on credit rating agencies introduced after the great recession were able to tackle all the pre-crisis credit rating agencies' related issues. By examining the role of rating agencies in the global financial crisis and in the European sovereign debt crisis, the study provides a description of the different weaknesses in credit rating agencies' functions which eventually contributed to the build-up and unfolding of the great recession. A qualitative and literature-based methodology is utilised for the purpose of this study particularly because such method is valuable to provide a much more inclusive analysis. In order to assess the effectiveness of the European Union's regulatory regime on credit rating agencies', the study takes a detailed stock of each round of legislation and examines whether the regulatory responses have managed to address the weaknesses expounded by these agencies. This study revealed that the post-crisis regulatory regime on the credit rating industry managed to effectively respond to the majority of credit rating agencies' shortcomings that have been revealed in the wake of the great recession. The study also sheds light on issues that need to be altered to augment the effectiveness of the European Union's regulatory package on rating agencies.