Ratings and Regulation: A Case of an Irreversible Marriage?

Abstract

What are the rationales for policymakers to rely on putatively disinterested actors such as credit rating agencies (CRAs) for financial regulatory input? This paper draws on perspectives from International Political Economy and Comparative Legal Studies to analyze the reasons behind the use and retention of external ratings as an indirect instrument of financial regulation. We find that allowing 'market practice' to determine the relationship between ratings and regulation creates tautological justifications of the CRAs' authority, and raises compelling questions in terms of legitimacy.The purpose of this paper is to uncover the constitutive elements of the tacit acquiescence underlying the subordination to CRA ratings in regulatory matters. The examination of possible conceptualizations of legitimacy may help conduct further inquiries into the politics of technocracy.