Reforming Credit Rating Agencies: More Competition, Less Regulation or Both? A Proposal for Moving Forward

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R. Shyam Khemani, Ritha Khemani, Jan 28, 2014

While the root causes of various financial crises during the past two decades have differed, there have been recurrent questions regarding the possible role played by the Credit Ratings Agencies . Among the concerns that have been raised are: the highly concentrated nature of the credit rating industry, with the leading three CRAs (viz., Moody’s, S&P, and Fitch) accounting for the bulk of the global rating services market; their oligopolistic interdependent and possibly tacit collusive behavior, suggesting lack of effective competition; limited diversity and choice among “globalized” rating agencies; and regulatory and other barriers to entry that entrench the incumbent CRAs. In addition, the failure of the CRAs to properly rate sovereign debt during the Asian financial crisis or, more recently, corporate debt in the case of the Lehman Bros. bankruptcy, and other lapses point to major errors committed by the CRAs.

These errors have led to increased calls for reform and change-such as promoting greater competition, and/or revising the regulations governing CRAs, or even creating new bodies that could perform the function of CRAs-though these calls tend to wane when the financial crisis is over and economic recovery starts taking place. However, it is precisely during the post-crisis period-such as now-that stocktaking and assessment of CRAs should take place, an…

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