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The Financial Crisis and the Regulation of Credit Rating Agencies : A European Banking Perspective

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  • Siegfried Utzig

    (Asian Development Bank Institute)

Abstract

Credit rating agencies (CRAs) bear some responsibility for the financial crisis that started in 2007 and remains ongoing. This is acknowledged by policymakers, market participants, and by the agencies themselves. It soon became clear that, given the depth of the crisis, CRAs would not be able to satisfy policymakers by eliminating flaws in their rating methods and improving corporate governance. Although the CRAs were more or less unregulated before the outbreak of the financial crisis, after the crisis started, politicians became increasingly vocal in demanding regulation. Initially, these demands were confined to a more binding form of self-regulation. But as the crisis progressed, the calls for state regulation grew ever louder. It became apparent after the November 2008 G-20 summit in Washington that state regulation could no longer be avoided. In Europe, the course had been set in this direction even before then. Since European policymakers saw the crisis as evidence that the Anglo-Saxon approach to the financial markets had failed, they believed they were now strongly placed to have a decisive influence on shaping a new international financial order. It is remarkable to note the shift in European policy from a self-regulatory approach, which was comparatively liberal in international terms, to quite rigorous state regulation of CRAs. Both the European Commission and the European Parliament drew up far-reaching plans. Although European policymakers knew that only globally consistent regulation would be appropriate for a new world financial order, their initial draft legislation was geared more toward stand-alone European regulation. While the final version of the European Union Regulation on Credit Rating Agencies focuses firmly on the European arena, the key point for all market participants is that this is unlikely to have an adverse effect on the global ratings market. It must nevertheless be recognized that the scope of the selected regulatory approach is extremely narrow. Certainly, it has the potential to improve the corporate governance of CRAs and prevent conflicts of interests. But it can do nothing to address the repeated calls for greater competition or for CRAs to be made liable for their ratings.

Suggested Citation

  • 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.
  • Handle: RePEc:eab:financ:21990
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    References listed on IDEAS

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    1. 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, vol. 10(4), pages 69-108, October.
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    Cited by:

    1. repec:ces:ifodic:v:8:y:2010:i:1:p:14566914 is not listed on IDEAS
    2. Sylvester Eijffinger & Donato Masciandaro (ed.), 2011. "Handbook of Central Banking, Financial Regulation and Supervision," Books, Edward Elgar Publishing, number 14064.
    3. Jakob De Haan & Fabian Amtenbrink, 2011. "Credit Rating Agencies," Chapters,in: Handbook of Central Banking, Financial Regulation and Supervision, chapter 19 Edward Elgar Publishing.
    4. Sensoy, Ahmet & Eraslan, Veysel & Erturk, Mutahhar, 2016. "Do sovereign rating announcements have an impact on regional stock market co-movements? The case of Central and Eastern Europe," Economic Systems, Elsevier, vol. 40(4), pages 552-567.
    5. Chiwitt, Ulrich, 2014. "Ratingagenturen - Fluch oder Segen? Eine kritische Bestandsaufnahme," Arbeitspapiere der FOM 48, FOM Hochschule für Oekonomie & Management.
    6. repec:wsi:qjfxxx:v:02:y:2012:i:01:n:s2010139212500024 is not listed on IDEAS
    7. Richard Herring & Edward J. Kane, 2010. "Rating "Agencies": How Regulation Might Help," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 8(1), pages 14-23, 04.

    More about this item

    Keywords

    credit rating agencies; financial crisis; financial regulation; European Regulation;

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • 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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