A Theoretical and Empirical Review of the EU Regulation on Credit Rating Agencies: In Search of Truth, Not Scapegoats

Abstract

The undergoing financial turbulence has raised significant concerns over the role that credit rating agencies (CRAs) played in the inception, magnification and expansion of the crisis. In response, the EU legislature has adopted Regulation 1060/2009, which, for the first time, set out a legally binding pan‐European authorization regime for CRAs, which issue ratings that have been used by EU‐based financial institutions. As the turmoil turned into an unprecedented Eurozone debt crisis, EU politicians have been calling for tighter regulation of the credit rating industry. Drawing on the relevant empirical and theoretical research and building upon a comparative study of the corresponding US framework, the paper discusses critically the principles underlying EU Regulation 1060/2009 and the most recent suggestions for its reform. The paper argues that although, overall, the EU Regulation seems to be a well‐balanced instrument in the sense that it introduces the essential checks upon CRAs’ behavior while avoiding excessive regulatory intervention, more fine‐tuning is needed in certain fields, including, rating shopping, financial ties with rated entities, abuse of inside information, transparency and CRAs’ accountability.

An Analysis of Market Participants’ Perceptions on the EU Credit Rating Agency Regulations

“…While the revisions may denote a changing regulatory climate, it could be surmised that they were not well-thought through, hence the rapid revisions. Since their inception in 2009 concerns have been raised that the regulations were not finely-tuned enough to address the problems that had led to the crisis in the first place (Staikouras, 2012); that they were not adequate to address the legacy problems in the industry (Papaikonomou, 2010;Utzig, 2010) and that they had unintended consequences on the market (Avgouleas, 2010). This study therefore sought to gauge market participants' perceptions of the EC regulations to investigate the above concerns.…”

“…The securities industry has for a long time operated without regulation, triggering incessant calls for regulation, particularly the regulation of CRAs. Despite the gazetting of the 2009 EC regulations, various scholars raised concerns that the regulations were not finely-tuned enough to address the problems that had led to the crisis in the first place (Staikouras, 2012); that they were not an adequate (Nichols et al, 2011;Papaikonomou, 2010;Utzig, 2010) and that they posed unintended consequences (Avgouleas, 2010)as they were not well-thought through (Fisch, 2010). Using a selection of metaphors drawn from participants in this study, results indicated a pervasive concern by UK-based study participants, echoing evidence from extant literature.…”

Credit Rating Agencies and the IPE: Not as influential as thought?

“…This strategic position in the new 815 global political economy has afforded them increased influence over the movements of private capital. This influence is further reinforced by the use of the agencies' output in official regulatory schemes in the U.S and elsewhere (cf., Bruner and Abdelal, 2005;Staikouras, 2012). Therefore, CRAs are promoted to gatekeepers of substantial amounts of capital, and access to these investment sources often relies on rating scores.…”

Role and Regulation of Credit Rating Agencies: The European Way

“…This question represents one of the most contentious issues of the ongoing debate at the international level. However, there is a lack of a detailed and coherent picture that is able to synthesize the different perspectives of analysis to provide answers to the open questions regarding the need for regulation (Dittrich 2007;Staikouras 2012). Therefore, this article investigates the changes regarding the role and regulation of CRAs in theory and practice, focusing on the European Union.…”