The Negative Impact of Credit Rating Agencies and Proposals for Better Regulation

Working Paper

Research Division EU Integration

Stiftung Wissenschaft und Politik

German Institute for International

and Security Affairs

©

John Ryan

The Negative Impact of

Credit Rating Agencies

and proposals for

better regulation

Professor John Ryan is a Fellow at the Centre

for International Studies, London School of

Economics and was a visiting scholar at the

Stiftung Wissenschaft und Politik

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Working Paper FG 1, 2012/Nr. 01, January 2012

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Table of Contents

1. Introduction 3

2. Background on Credit Rating Agencies 6

2.1. Definitions 6

2.2. Criticisms of CRAs 8

2.3 Did Credit Rating Agencies trigger the Financial Crisis? 12

3. The Credit Rating Oligopoly 14

3.1 How does the Oligopoly Continue to Exist? 15

3.2 Market Power in the Hands of the Incumbent Agencies and Collusion 15

3.3 Moral Hazard Behaviour in the Credit Rating Industry 16

3.4 The EU and China: New Market Entrants? 16

4. Conclusion 18

Introduction

1. Introduction

This paper analyses the ongoing reputational crisis of Credit Rating

Agencies (CRAs) and asks if the CRAs are playing a credible role in Eurozone financial markets. The current crisis in the Eurozone supports the

proposition of skepticism on the credibility of CRAs which did not

properly disclose risk and thus contributed to pushing the global financial

system to the verge of collapse. Politicians across the European Union have

called for restrictions on the role of CRAs in rating sovereign debt and for

increased regulation of CRAs. In the U.S. the credit ratings agencies hide

behind the First Amendment. Their legal argument is that they cannot be...