Credit Ranking Agencies in Global Economic Governance

Abstract

Credit Rating agencies (CRAs) have become a target for criticism from governments and market participants for their inability to correctly assess the risks related to the circulation of certain financial instruments or their often pro-cyclical impact on the economy of rated sovereigns. The credit rating industry has been largely deregulated both on the global and European levels. The mortgage crisis in the USA and then the global financial and economic crisis as well as the sovereign debt crisis in the Euro area forced governments to investigate the role of the CRAs in generating those crises and search for approaches to enhance the credibility of agencies and improve the quality of their ratings. The article details the specific features of the credit rating industry which are the oligopolistic structure of the industry, occurrence of potential conflicts of interests between agencies and their clients as well as inadequate transparency and disclosure of information. Then the author analyzes American and European initiatives addressing those highly controversial issues. The first steps towards regulation of CRAs were taken in the USA in 2006, while the EU didn’t have any regulation of CRA prior to 2008. The EU didn’t manage to change or even challenge the current state of affairs where around 97% of the market belongs to the “big three”: Moody’s, Standard & Poors and Fitch. The European initiatives were in line with the US congress regulations and didn’t contain any new proposals. Regardless of the fact that the EU prepared a number of reports on CRA and initiated the creation of a European Credit Rating foundation, it didn’t start to play an active role in the global governance of CRAs.