Regulating credit rating agencies : time for reform?

Abstract

Credit rating agencies are major players on modern financial markets. However, unlike other participants thereon, they are subject to minimal, if any, regulation. Reputational capital is often brought to bear as a much better regulatory force than any regulations that could he imposed on the rating industry. However, it may be that these agencies have come close to spending all such capital through the excesses of the financial scandals that have come to characterize these past years. ls it time to bring credit rating agencies within the regulatory fold? Chapter One seeks to identify the subject of this dissertation by distinguishing credit rating agencies from other bodies that consider creditworthiness, tracing their development into today's influential organisations and providing a framework of how and what they actually do. In Chapter Two an attempt is made at pointing out the problems which raise doubts as to the rating agencies' integrity and independence. Their internal mechanisms as well as their relations with issuers are explored to identify those idiosyncrasies that have undermined their credibility and have rendered their judgement questionable in the eyes of ratings' users. The quasi self-regulatory regime to which the rating industry is subject is explored in Chapter Three. The codes of conduct introduced and applied vis-a-vis rating agencies by market participants are considered, with their shortcom.ings being investigated. These inadequacies do not result in a proper regulation of the rating industry, leaving much to be desired by way of accountability and impartiality. In Chapter Four the statutory regulatory regimes applicable vis-a-vis credit rating agencies, be they generic or specific, are examined. Particular emphasis is here put on describing the regulatory role assigned to rating agencies within prudential supervisory regimes. In concluding some guidelines are set out as to what may be the ideal form of regulation applicable to the rating industry - effective without being suffocating.