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A Question of Credibility: Enhancing the Accountability and Effectiveness of Credit Rating Agencies

Author

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  • Stéphane Rousseau

    (Université de Montréal)

Abstract

In the wake of the financial crisis, Credit Rating Agencies (CRAs) have been criticized for having played a significant role in the market turmoil. Numerous reports have identified failures on the part of CRAs that have affected the quality and integrity of the rating process. In light of the critiques, a strong consensus has emerged among policymakers that regulatory intervention is needed. In Canada, the European Union and the United States, policymakers have opted for registration systems. Three major areas of reform should be pursued. The first pertains to the elimination of regulatory references to ratings. The second area relates to the development of a due diligence obligation for institutional investors with respect to the creditworthiness of issuers. The final area of reform concerns the disclosure of information on underlying assets by issuers of structured finance products. Given that these reforms imply important changes to the regulatory landscape, an incremental approach is the preferable route.

Suggested Citation

  • Stéphane Rousseau, 2012. "A Question of Credibility: Enhancing the Accountability and Effectiveness of Credit Rating Agencies," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 356, July.
  • Handle: RePEc:cdh:commen:356
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    File URL: https://www.cdhowe.org/public-policy-research/question-credibility-enhancing-accountability-and-effectiveness-credit-rating-agencies
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    References listed on IDEAS

    as
    1. Ljungqvist, Alexander & Marston, Felicia & Starks, Laura T. & Wei, Kelsey D. & Yan, Hong, 2007. "Conflicts of interest in sell-side research and the moderating role of institutional investors," Journal of Financial Economics, Elsevier, vol. 85(2), pages 420-456, August.
    2. Efraim Benmelech & Jennifer Dlugosz, 2010. "The Credit Rating Crisis," NBER Chapters,in: NBER Macroeconomics Annual 2009, Volume 24, pages 161-207 National Bureau of Economic Research, Inc.
    3. repec:reg:rpubli:345 is not listed on IDEAS
    4. Bo Becker & Todd Milbourn, 2008. "Reputation and competition: evidence from the credit rating industry," Harvard Business School Working Papers 09-051, Harvard Business School, revised Sep 2010.
    5. Jakob De Haan & Fabian Amtenbrink, 2011. "Credit Rating Agencies," Chapters,in: Handbook of Central Banking, Financial Regulation and Supervision, chapter 19 Edward Elgar Publishing.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Lawrence J. White, 2013. "Credit Rating Agencies: An Overview," Annual Review of Financial Economics, Annual Reviews, vol. 5(1), pages 93-122, November.
    2. Lawrence J. White, 2016. "Credit Rating Agencies: An Analysis Through the Lenses of Industrial Organization, Finance and Regulation," Pacific Economic Review, Wiley Blackwell, vol. 21(2), pages 202-226, May.
    3. Jory, Surendranath R. & Ngo, Thanh N. & Wang, Daphne, 2016. "Credit ratings and the premiums paid in mergers and acquisitions," Journal of Empirical Finance, Elsevier, vol. 39(PA), pages 93-104.

    More about this item

    Keywords

    Financial Services; Economic growth and innovation; Canada; Credit Rating Agencies (CRAs);

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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