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Credit rating agencies and global financial crisis: Need for a paradigm shift in financial market regulation

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  • Vassiliki L. Papaikonomou

Abstract

Purpose - This paper attempts to identify the areas for further research related to regulating credit-rating agencies (CRAs), in order to assess whether the prerequisite for a “complete change” is present so to achieve a genuine paradigm shift on the matter. Design/methodology/approach - An overview of the unregulated background of CRAs is presented followed by the European Union's and USA's regulatory initiatives together with a critical assessment of the former and an identification of the substantive areas for further thinking. Findings - The adequacy of the recent CRAs regulation is questioned in the light of the need to take account of crucial elements such as scope, use of methodologies, due diligence and the regulatory reliance on ratings. A definition of competition is also warranted as well as a questioning of the “issuer pays” model and an assessment of the impact of ratings on systemic risk. An alternative regulatory response could take a more general view of regulating the credit-rating activity as a whole and on a world wide scale. Originality/value - This paper identifies areas for further research needed for an assessment of the most suitable regulation for the credit-rating activity. Also, the paper focuses on the need to better understand the complicated nature, functioning and impact of CRAs in the financial system in order to map the different challenges for regulators, politicians, practitioners and academics.

Suggested Citation

  • 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.
  • Handle: RePEc:eme:sefpps:v:27:y:2010:i:2:p:161-174
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    References listed on IDEAS

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    1. Forster, Josef, 2008. "The Optimal Regulation of Credit Rating Agencies," Discussion Papers in Economics 5169, University of Munich, Department of Economics.
    2. Arnoud W. A. Boot & Todd T. Milbourn & Anjolein Schmeits, 2006. "Credit Ratings as Coordination Mechanisms," Review of Financial Studies, Society for Financial Studies, pages 81-118.
    3. Cantor, Richard, 2004. "An introduction to recent research on credit ratings," Journal of Banking & Finance, Elsevier, vol. 28(11), pages 2565-2573, November.
    4. Amadou N.R. Sy, 2009. "The Systemic Regulation of Credit Rating Agencies and Rated Markets," World Economics, World Economics, 1 Ivory Square, Plantation Wharf, London, United Kingdom, SW11 3UE, pages 69-108.
    5. Philippe Robert-Demontrond & R. Ringoot, 2004. "Introduction," Post-Print halshs-00081823, HAL.
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    Cited by:

    1. Ngwu, Franklin N. & Chen, Zheyang, 2016. "Regulation of securitisation in China: Learning from the US experience," Research in International Business and Finance, Elsevier, pages 477-488.

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