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The Governance of Credit Rating Agencies

Regulatory Regimes and Liability Issues

Andrea Miglionico

The global crisis revealed that credit rating agencies (CRAs) are capable of bringing about potential distortions in the financial sector, thereby resulting in a reduction in market confidence which, in turn, influences negotiations and expectations. CRAs need to be held accountable for lack of transparency and inaccurate ratings, however the existing regulatory framework does not secure adequate investor protection. This book provides a new and important contribution to research in the area, at a crucial time in the debate around financial regulation and investment regimes.
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Chapter 2: BUSINESS MODEL OF CRAs

Andrea Miglionico

Extract

Chapter 2 focuses on the reliability of CRAs, since this has been questioned following the mis-evaluation of the default risk attaching to certain financial products—such as subprime mortgages and derivatives—that adversely affected the stability of securities markets. The CRAs have become major players in the financial markets yet their reputations have been tarnished by certain assessments issued during the 2007–09 financial crisis. This chapter provides evidence into aspects such as: (1) the motivation of CRAs to issue solicited or unsolicited ratings; (2) the discretion of CRAs to bring into play evaluation models and to control the treatment of information; and (3) the assessment of rating agencies’ responsibility. The results are interpreted with regard to the standard of rating activity, evaluating positive and negative effects of adopted regulation. This analysis offers significant implications with regard to an applicable normative framework. There is therefore a clear need to regulate the practice of the highly influential, though at times inaccurate, ratings of these agencies.

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