Regulating credit ratings agencies: where to now?

This paper reviews current proposals to regulate credit rating agencies. They proposals can be classified in two broad areas: (1) micro-prudential measures and (2) measures to expand and refine the regulatory perimeter. While the previous regulations relied on micro-prudential measures, experience from the U.S. subprime crisis and the European sovereign debt crisis shows that such an approach did not address the negative externalities from credit ratings, prompting the need to expand the regulatory perimeter. This paper highlights two types of regulation seeking to expand the regulatory perimeter: (i) those that attempt to take credit ratings out of regulation such as Section 939A of the 2010 Dodd-Frank Act and (ii) those that aim to reduce the importance of credit ratings in regulation such as the recent changes to the ECB collateral rules. This paper argues, however, that, it remains important that policymakers conduct formal assessments of the impact of the use of credit ratings on financial markets, especially in private contracts such as credit default swaps (CDS) and institutional investors’ investment policies. Additional capital requirements and/or liquidity buffers could be used if necessary to mitigate the systemic risk of credit ratings.