Credit Rating Agencies (CRAs) : The EU Regulatory Framework Assessment
Boehm, Kristina (2013)
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Credit Rating Agencies (CRAs) can provide a valuable service for the capital markets if they deliver a credible assessment of the relative probability of default of credit financial instruments that enables investors to reduce the information asymmetry. CRAs have had an indisputable role in accentuating the crisis, and preventative regulation of CRAs has emerged as crucial and necessary, becoming a priority in all high-level policy decisions in Europe and worldwide. This thesis will first present a brief overview, defining credit rating concept, giving an account on market leaders and history of CRAs. Then the researcher critically examines the regulatory approach adopted by the EU since the first calls to regulate CRAs in Europe. Some of the US initiatives will also be reviewed in order give a more comprehensive assessment for regulating the credit-rating activity as a whole. As the research progresses, it becomes abundant, that CRAs cannot predict whether a particular default occurs, thus, perhaps over-reliance on CRAs is one the main causes why CRAs bolster the financial disruptions. However, there are many ethical problems to overcome in relation to CRAs: conflict of interest, moral hazard, information asymmetry, and even when some are eliminated, for instance free rider problem may arise. There is no ideal solution for CRA business model – the existing model wisely combines issuer-pays and investor-pays approaches. As for regulation, a European CRA has been considered, but feasibility analysis has shown such may be costly or even pose another ethical threat. Newly created ESMA has to gain more experience to continue tackling CRAs issues.