CEPS - Credit Rating Agencies: Part of the Solution or Part of the Problem?

Credit Rating Agencies: Part of the Solution or Part of the Problem?


Gunther Tichy

"Credit rating agencies have come under increased scrutiny since the fi nancial crisis. Their failure to recognise the threats to the fi nancial system prior to the crisis coupled with their steady downgrading of European sovereign debt has led to much criticism, especially from European politicians and economists. This Forum examines the major agencies’ infl uence, independence and performance and explores whether a publicly funded European agency would improve the situation..."


...
"...There is no simple method to regulate and sanction informal judgement. Although additional measures are necessary to compensate for the inadequacies of the existing CRA framework, I posit that a quasi-public EU rating agency is not the solution. Rather than reducing the mechanistic overreliance on external forms of assessment, an EU CRA can have the effect of actually heightening this dependence. ESMA registration can contribute to institutionalising the status of ratings while it dilutes the lower rungs of the ratings industry. That can only enhance the legitimacy of Moody’s or S&P. Severe confl icts of interest will compound these challenges. Neither does this proposal redress the fallacious analytics of ratings and their poor quality. Overall, an EU CRA can undermine the EU’s authority to manage effectively the sovereign debt crisis."

Source: http://www.ceps.eu/files/article/2011/10/Forum.pdf