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Ratings Performance, Regulation and the Great Depression: Lessons from Foreign Government Securities

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  • Flandreau, Marc
  • Gaillard, Norbert
  • Packer, Frank

Abstract

During the 1930s, rating agencies took up a central role in regulatory supervision that they still have today. We study the process through which they received this regulatory license. The proximate cause for this changeover was the economic shock of the Great Depression. Exploring the performance of rating agencies in assessing the risks of sovereign debt, an important segment of the bond market, we show that superior forecasting capacities cannot explain the agencies’ growing importance. We argue that the agencies’ perceived lack of conflicts of interest (in contrast to other financial intermediaries) was a major factor in bringing them to the forefront of a new regulatory regime.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7328.

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Date of creation: Jun 2009
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Handle: RePEc:cpr:ceprdp:7328

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Keywords: great depression; Rating agencies regulatory licence; sovereign debt;

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References

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  1. Flandreau, Marc & Flores, Juan H., 2009. "Bonds and Brands: Foundations of Sovereign Debt Markets, 1820–1830," The Journal of Economic History, Cambridge University Press, vol. 69(03), pages 646-684, September.
  2. W. Braddock Hickman, 1953. "The Volume of Corporate Bond Financing Since 1900," NBER Books, National Bureau of Economic Research, Inc, number hick53-1, July.
  3. Reinhart, Carmen, 2002. "Sovereign Credit Ratings Before and After Financial Crises," MPRA Paper 7410, University Library of Munich, Germany.
  4. Thomas R. Atkinson, 1967. "Trends in Corporate Bond Quality," NBER Books, National Bureau of Economic Research, Inc, number atki67-1, July.
  5. W. Braddock Hickman, 1958. "Corporate Bond Quality and Investor Experience," NBER Books, National Bureau of Economic Research, Inc, number hick58-1, July.
  6. Reisen, Helmut & von Maltzan, Julia, 1999. "Boom and Bust and Sovereign Ratings," International Finance, Wiley Blackwell, vol. 2(2), pages 273-93, July.
  7. Richard Cantor & Frank Packer, 1995. "Sovereign credit ratings," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 1(Jun).
  8. Megginson, William L & Weiss, Kathleen A, 1991. " Venture Capitalist Certification in Initial Public Offerings," Journal of Finance, American Finance Association, vol. 46(3), pages 879-903, July.
  9. repec:reg:rpubli:345 is not listed on IDEAS
  10. W. Braddock Hickman, 1960. "Statistical Measures of Corporate Bond Financing Since 1900," NBER Books, National Bureau of Economic Research, Inc, number hick60-1, July.
  11. Hill, Paula & Brooks, Robert & Faff, Robert, 2010. "Variations in sovereign credit quality assessments across rating agencies," Journal of Banking & Finance, Elsevier, vol. 34(6), pages 1327-1343, June.
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Cited by:
  1. Marc Flandreau & Juan H. Flores & Norbert Gaillard & Sebastián Nieto-Parra, 2009. "The End of Gatekeeping: Underwriters and the Quality of Sovereign Bond Markets, 1815-2007," NBER Working Papers 15128, National Bureau of Economic Research, Inc.
  2. Lawrence J. White, 2013. "Credit Rating Agencies: An Overview," Annual Review of Financial Economics, Annual Reviews, vol. 5(1), pages 93-122, November.
  3. Agliardi, Elettra & Agliardi, Rossella & Pinar, Mehmet & Stengos, Thanasis & Topaloglou, Nikolas, 2012. "A new country risk index for emerging markets: A stochastic dominance approach," Journal of Empirical Finance, Elsevier, vol. 19(5), pages 741-761.
  4. Lawrence J. White, 2010. "Markets: The Credit Rating Agencies," Journal of Economic Perspectives, American Economic Association, vol. 24(2), pages 211-26, Spring.
  5. Flandreau, Marc & Gaillard, Norbert & Panizza, Ugo, 2010. "Conflicts of Interest, Reputation, and the Interwar Debt Crisis: Banksters or Bad Luck?," CEPR Discussion Papers 7705, C.E.P.R. Discussion Papers.

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