Regulating credit rating agencies: The issue of conflicts of interest in the rating of structured finance products

Johansson, Tobias
December 2010
Journal of Banking Regulation;Dec2010, Vol. 12 Issue 1, p1
Academic Journal
As a result of the financial crisis, the work of the credit rating agencies (CRAs) has been questioned. It is said that they underestimated the risk in structured finance products and allowed conflicts of interest (for example, the issuer-pays model) to affect their ratings. Consequently, the regulatory frameworks have been reviewed. This article reflects upon the ongoing debate and suggests that the issue of conflicts of interest should be approached in a complete and coherent manner; in addition to regulating CRAs, other contributing factors need to be addressed. As a result, three different proposals are put forward. First, it is argued that regulation of CRAs is necessary, but with more global convergence and less detailed provisions than under current regimes. Accordingly, the introduction of a global, principles-based rulebook is advocated. Second, it is suggested that CRAs should be held civilly liable for malfeasance to the same standards of negligence as those applying to other institutions, which is not the case today because of a 'privileged' regulatory treatment. Finally, a case is made for less reliance on ratings since that would increase market heterogeneity, thereby contributing to a more resilient financial system that is less susceptible to the potential effects of conflicts of interest in CRAs.


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