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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 4: THE US REGIME

Andrea Miglionico

Extract

Chapter 4 examines the US system of authorization and recognition of CRAs as Nationally Recognized Statistical Rating Organization (NRSRO). The importance of this discussion lies in the significant role authorized by the NRSRO in allowing the use of ratings within the regulatory framework. By conferring on ratings the power to determine the credit risk of assets, the NRSRO incautiously placed much reliance on CRAs’ activities. This chapter also addresses the major issues that the system of the NRSROs brought into being within the ratings industry. These included barriers to entry, poor competition and overreliance by regulators. It is argued that the creation and development of an NRSRO system has provided ratings with the status of special label for the quality of debt instruments.

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