The Discipline of Credit Rating Agencies

Luca Giordano, Valerio Novembre, Neomisio Susi

This article was first published as a chapter in Basel III and Beyond, by Risk Books.

Credit rating agencies (CRAs) play an important role in global securities and banking markets, as their credit ratings are used by investors, borrowers, issuers and governments as part of making informed investment and financing decisions. Credit institutions, investment firms, insurance undertakings, reinsurance undertakings, undertakings for collective investment in transferable securities (UCITS) and institutions for occupational retirement provision may use those credit ratings as the reference for the calculation of their capital requirements for solvency purposes or for calculating risks in their investment activity. However, their function had been increasingly questioned, especially with regard to the role credit ratings for structured finance had played in prompting the crisis. Many observers have argued that CRAs hold key responsibility for the crisis. In particular, they have been accused of oligopolistic behaviour, and of reacting slowly when downgrading to market trends. Also, their conflicts of interest and sometimes over-optimistic creditworthiness opinions have been increasingly

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