The regulatory context highlights why CRAs have become so central to the capital markets even though credit ratings are not the only source of financial information. Favorable regulatory treatment has given a significant privilege to CRAs – especially to leading and certified CRAs such as Moody’s, Standard & Poor’s and Fitch. Indeed, rating-based regulations enhance the importance of ratings in the financial system. CRAs are less subject to private market forces if market participants are – for regulatory purposes – forced to rely on their ratings regardless of their performance. Rating-based regulations also give a regulatory privilege to certified CRAs as opposed to non-certified CRAs. The first use of credit ratings in financial market regulations stems from the 1930s in the US. Especially since the 1970s ratings have been increasingly used in all kinds of regulations. As additional regulations came to depend more on ratings, these ratings became more important and more valuable; however, the value of the information they generate did not increase. In fact, the regulatory use of ratings has had a detrimental impact on competition in the rating industry and has been heavily criticized by many scholars. Rating-based regulations are purported to create wrong incentives in the rating industry, thereby jeopardizing the quality of the ratings. Major problems arise insofar as CRAs are private-sector entities with quasi-regulatory power. Concern has been raised among scholars about the fact that regulators should completely withdraw rating-based regulations and find an alternative to ratings. For instance, many researchers plead for the use of market-based information as a substitute for ratings.
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