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The Systemic Regulation of Credit Rating Agencies and Rated Markets

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  • Amadou N. R. Sy

Abstract

Credit ratings have contributed to the current financial crisis. Proposals to regulate credit rating agencies focus on micro-prudential issues and aim at reducing conflicts of interest and increasing transparency and competition. In contrast, this paper argues that macro-prudential regulation is necessary to address the systemic risk inherent to ratings. The paper illustrates how financial markets have increasingly relied on ratings. It shows how downgrades have led to systemic market losses and increased illiquidity. The paper suggests the use of "ratings maps" and stress-tests to assess the systemic risk of ratings, and increased capital or liquidity buffers to manage such risk.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 09/129.

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Length: 36
Date of creation: 01 Jun 2009
Date of revision:
Handle: RePEc:imf:imfwpa:09/129

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Related research

Keywords: Bank supervision; Banking sector; Bonds; Credit risk; Financial risk; Financial systems; Governance; Nonbank financial sector; Risk management; Securities regulations;

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Cited by:
  1. Vassiliki L. Papaikonomou, 2010. "Credit rating agencies and global financial crisis: Need for a paradigm shift in financial market regulation," Studies in Economics and Finance, Emerald Group Publishing, vol. 27(2), pages 161-174, June.
  2. Duan, Jin-Chuan & Van Laere, Elisabeth, 2012. "A public good approach to credit ratings – From concept to reality," Journal of Banking & Finance, Elsevier, vol. 36(12), pages 3239-3247.
  3. Erik R. Fasten & Dirk Hofmann, 2010. "Two-sided Certification: The market for Rating Agencies," SFB 649 Discussion Papers SFB649DP2010-007, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  4. Clyde Goodlet, 2010. "Too Big to Fail: A Misguided Policy in Times of Financial Turmoil," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 311, October.
  5. Siegfried Utzig, 2010. "The Financial Crisis and the Regulation of Credit Rating Agencies : A European Banking Perspective," Finance Working Papers 21990, East Asian Bureau of Economic Research.

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