Chapter 10: System-relevance of credit ratings
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The systemic relevance of credit ratings issued by the leading CRAs gives rise to increasing concerns in modern financial markets. On the one hand, stringent criticism has recently been raised about the rating industry in Europe, where politicians were livid at the downgrades of sovereign debt such as the Greek debt. Leading CRAs were accused of exacerbating the financial turmoil in the EU by downgrading a number of sovereign bonds, thereby making bond refinancing more difficult. On the other hand – with respect to legislation – the Dodd-Frank Act of 2010 expressly acknowledges the systemic importance of credit ratings. This Act gives particular weight to the question by mentioning the systemic issue in the first sentence of its CRA reform. However, the agency reform embedded in the Dodd-Frank Act has not taken any direct measures specifically designed to address systemic problems in the rating industry. Hitherto only a few research articles have focused on the systemic issue related to ratings. On the global scale, the Financial Stability Board (FSB) released its Principles for Reducing Reliance on CRA Ratings in October 2010. The fact that the FSB draws attention to the rating industry highlights the systemic relevance of CRAs as this international body is mandated to strengthen the financial system and deal with systemic risk. Therefore, the topic clearly presents an important agenda for research. In the financial markets, it is inappropriate to give the same financial information to every market participant at the same time.

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