Chapter 12: Regulatory response to the systemic issue
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The systemic importance of credit ratings results from over-reliance on the ratings of the Big Three. The key objective of reforms consists of moving away from regulatory references to ratings and behavioral reliance. From a regulatory perspective, the main problem of pre-crisis regulations is that they primarily focused on individual market participants rather than the financial system as a whole. In particular, Basel II embodied the failure of regulators to incorporate systemic risks into bank capital requirements. Financial reforms post-crisis tend to shift to macroprudential regulation. Accordingly, Basel III introduced counter- cyclical capital buffers but it has not yet proposed a new model to withdraw the regulatory use of ratings from capital requirement regulations. With respect to CRA reforms, the trend to eliminate the use of ratings for regulatory purposes has been initiated. In the US, the Dodd-Frank Act of 2010 has acknowledged that rating-based regulations are inconsistent with the proper functioning of market forces in the rating industry. The Act removed regulatory references to ratings from financial market regulations. This step is a substantial measure designed to reduce over-reliance on ratings. Another regulatory trend consists of increasing the number of certified CRAs. The Credit Rating Agency Reform Act of 2006 aimed to improve rating quality by fostering accountability, transparency and competition in the rating industry. The Securities and Exchange Commission (SEC) designated more NRSROs in order to enhance competition among them. The rating industry went up to ten registered NRSROs as of December 2012.

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