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

Author

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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.

Suggested Citation

  • Flandreau, Marc & Gaillard, Norbert & Packer, Frank, 2009. "Ratings Performance, Regulation and the Great Depression: Lessons from Foreign Government Securities," CEPR Discussion Papers 7328, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:7328
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    References listed on IDEAS

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    1. Flandreau,Marc & Holtfrerich,Carl-Ludwig & James,Harold (ed.), 2003. "International Financial History in the Twentieth Century," Cambridge Books, Cambridge University Press, number 9780521819954, May.
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    6. Reisen, Helmut & von Maltzan, Julia, 1999. "Boom and Bust and Sovereign Ratings," International Finance, Wiley Blackwell, vol. 2(2), pages 273-293, July.
    7. 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.
    8. W. Braddock Hickman, 1960. "Statistical Measures of Corporate Bond Financing since 1900," NBER Books, National Bureau of Economic Research, Inc, number hick60-1, May.
    9. Carl Shapiro, 1983. "Premiums for High Quality Products as Returns to Reputations," The Quarterly Journal of Economics, Oxford University Press, vol. 98(4), pages 659-679.
    10. Carmen M. Reinhart, 2002. "An Introduction," World Bank Economic Review, World Bank Group, vol. 16(2), pages 149-150, August.
    11. Helmut Reisen & Julia Von Maltzan, 1999. "Boom and Bust and Sovereign Ratings," International Finance, Wiley Blackwell, vol. 2(2), pages 273-293, July.
    12. W. Braddock Hickman, 1958. "Corporate Bond Quality and Investor Experience," NBER Books, National Bureau of Economic Research, Inc, number hick58-1, May.
    13. Richard Cantor & Frank Packer, 1995. "Sovereign credit ratings," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 1(Jun).
    14. 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(3), pages 646-684, September.
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    Cited by:

    1. Marc Flandreau & Juan H. Flores & Norbert Gaillard & Sebastián Nieto-Parra, 2010. "The End of Gatekeeping: Underwriters and the Quality of Sovereign Bond Markets, 1815-2007," NBER Chapters, in: NBER International Seminar on Macroeconomics 2009, pages 53-92, National Bureau of Economic Research, Inc.
    2. Marc Flandreau & Norbert Gaillard & Ugo Panizza, 2009. "Conflicts of Interest, Reputation and the Interwar Debt Crisis: Banksters or Bad Luck?," IHEID Working Papers 02-2010, Economics Section, The Graduate Institute of International Studies, revised Feb 2010.
    3. Lawrence J. White, 2010. "Markets: The Credit Rating Agencies," Journal of Economic Perspectives, American Economic Association, vol. 24(2), pages 211-226, Spring.
    4. Lawrence J. White, 2013. "Credit Rating Agencies: An Overview," Annual Review of Financial Economics, Annual Reviews, vol. 5(1), pages 93-122, November.
    5. 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.
    6. Accominotti, Olivier & Brière, Marie & Burietz, Aurore & Oosterlinck, Kim & Szafarz, Ariane, 2020. "Did Globalization Kill Contagion?," CEPR Discussion Papers 14395, C.E.P.R. Discussion Papers.

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    More about this item

    Keywords

    great depression; Rating agencies regulatory licence; sovereign debt;
    All these keywords.

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • N2 - Economic History - - Financial Markets and Institutions
    • N40 - Economic History - - Government, War, Law, International Relations, and Regulation - - - General, International, or Comparative

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