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Regulating rating agencies: A conservative behavioural change

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  • Jones, Laurence
  • Alsakka, Rasha
  • ap Gwilym, Owain
  • Mantovan, Noemi

Abstract

We investigate whether the European regulatory reforms of the credit rating industry have been successful in improving the quality of financial institutions’ credit ratings. A shift to more conservative rating behaviour rather than rating quality improvement is identified, which is attributable to increased regulatory scrutiny. This change leads to a reduction in rating inflation and an increase in the number of unwarranted downgrades and false rating warnings in the post-regulatory period. A significant decrease (increase) in the informativeness of rating downgrades (upgrades) is evident. Our findings contrast with prior evidence for US corporates where reputational effects dominated.

Suggested Citation

  • Jones, Laurence & Alsakka, Rasha & ap Gwilym, Owain & Mantovan, Noemi, 2022. "Regulating rating agencies: A conservative behavioural change," Journal of Financial Stability, Elsevier, vol. 60(C).
    • Handle: RePEc:eee:finsta:v:60:y:2022:i:c:s1572308922000274
    DOI: 10.1016/j.jfs.2022.100999
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    More about this item

    Keywords

    EU regulation of rating agencies; Rating quality; Rating conservatism; Disciplining hypothesis; Reputation hypothesis;
    All these keywords.

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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