The Physiological Conflict of Interest of Rating Agencies: Effectiveness of Current Regulatory Requirementsand Feasibility of Alternative Solutions

For many decades, the vast majority of credit ratings issued by credit rating agencies (CRAs) have been paid for by the issuers, following a market model in which raters are compensated by the same entities they evaluate (issuer-paid model). The potential conflict of interest arising from this relationship has consistently raised concerns about the independence of CRAs and the reliability of their ratings. In response to such criticism, EC Regulation 1060/2009 introduced specific rules aimed at preventing, identifying, and punishing behaviors – arising from economic incentives or threatening actions – that could undermine the objectivity and reliability of the rating process. However, the current regulation did not extinguish the debate on CRAs’ conflicts of interest, and over the last decade, various regulatory alternatives have been considered both in academic discourse and at the institutional level. This article first examines the most frequently recurring types of conflicts of interest affecting CRAs, highlighting behaviors most likely to impair the reliability of credit ratings. Secondly, the analysis ascertains whether EC Regulation 1060/2009 effectively prevents CRAs’ conflicts of interest and deters violations of the rules in force. Third, the paper examines the regulatory alternatives that have emerged within the academic and political arenas and seeks to determine whether they contain insightful suggestions that could inspire beneficial amendments to the current regulatory framework. The regulatory proposals are categorized into three different groups: those based on the revamping of a rating market primarily funded by investors (investor- paid model); those aspiring to prevent conflicts of interest by adjusting CRAs’ compensation structure; and those advocating a more pervasive intervention by public institutions. Finally, the article observes that the multiple flaws affecting the proposed alternatives offset their potential benefits and therefore concludes that EC Regulation 1060/2009, if complemented with thorough oversight by the European Securities and Markets Authority, serves as a well-balanced yet valuable regulatory framework to prevent and deter the most prominent types of conflicts of interest affecting credit ratings.