After the Financial Crisis
Edited by Sylvester Eijffinger and Donato Masciandaro
Jakob De Haan1 and Fabian Amtenbrink Introduction Since John Moody started in 1909 with a small rating book, the rating business has developed into a multi-billion dollar industry. Credit rating agencies (CRAs) play an important role in financial markets through the production of credit risk information and its distribution to market participants. Issuers, investors and regulators use the information provided by rating agencies in their decision-making. For instance, sovereigns seek ratings so that they can attract foreign investors. Likewise, ratings of structured products have been a key factor in the development of the originate-to-distribute model.2 Credit ratings also play an important role in financial market regulation. For instance, under Basel II financial institutions can use credit ratings from approved agencies when calculating their capital requirements. CRAs essentially provide two services. First, they offer an independent assessment of the ability of issuers to meet their debt obligations, thereby providing ‘information services’ that reduce information costs, increase the pool of potential borrowers, and promote liquid markets. Second, they offer ‘monitoring services’ through which they influence issuers to take corrective actions to avert downgrades via ‘watch’ procedures.3 CRAs have come under attack due to their role in the recent financial crisis. According to many observers, CRAs underestimated the credit risk associated with structured credit products. For instance, according to the International Monetary Fund (IMF), more than three 1 The views expressed do not necessarily reflect the views of De Nederlandsche Bank 2 IMF (2010). 3 Ibid. 573 574 The Architecture of Regulation and...
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