Quis Custodiet Ipsos Custodes? Revisiting Rating Agency Regulation

International Business Law Journal, Vol. 4, p. 569, 2008

48 Pages Posted: 18 Jan 2008 Last revised: 10 Dec 2008

Date Written: October 14, 2008


The phrase, neither a borrower nor a lender be, seems to have fallen out of favour in modern Canadian society, if it was ever heeded in its native context. In the modern market economy, access to loans, debentures, and other forms of debt capital can be an integral ingredient in a successful business venture. A business entity's access to capital, and investors' ability to provide that capital, is limited by the business's credit rating. Yet, this rating is determined by unregulated external credit rating agencies (CRAs) paid by the issuers, which encourages the possibility of agency cost market inefficiency, because rating agents may prefer their own interest to those of the debt market. While some authors argue that agencies' reputations can substitute for regulation, this paper will demonstrate that this passive belief may be na¿ve. Effective, comprehensive regulation would ensure that any rating agency in a conflict of interest - or perpetuating a potential conflict - will be sanctioned by strict liability. This will prevent rating agencies' clandestine and oligopolic access to information from allowing them to conceal their opportunism with impunity.

The recent 2007 sub-prime mortgage disaster again demonstrates how CRAs' decisive role in the market, without regulation to ensure their transparency and accountability, leads to abuses and - ultimately - to disaster. Despite the earlier lessons in Enron, as of early 2007, CRAs have continued to display languor in the face of impending crisis, while doling out top ratings to their paying customers - the very corporations they rate.

To substantiate the latter assertions, this paper will examine the following issues: 1) rating agencies' structure and function in the market; 2) rating agencies' modi operandi; 3) the current regulatory system governing rating agencies; and 4) proposed regulatory amendments.

Keywords: Credit Rating Agencies, Credit Rating Agency, CRAs, CRA, Credit Rating, Rating Agency, Rating Agencies, Sub-Prime Mortgage, RMBs, Subprime, Sub-Prime, Mortgage-Backed Securities, Fiduciary Obligation, Fiduciary, Enron, S&P, Moody's, Opportunism, Fiduciary, Credit Crisis, Credit, Business Law

JEL Classification: K22, D23, L13, L14, D63, G18, G22, G23, G24, G38

Suggested Citation

Kormos, Benjamin J., Quis Custodiet Ipsos Custodes? Revisiting Rating Agency Regulation (October 14, 2008). International Business Law Journal, Vol. 4, p. 569, 2008. Available at SSRN: https://ssrn.com/abstract=1085132

Benjamin J. Kormos (Contact Author)

Walsh Wilkins Creighton LLP ( email )

801 6th Avenue SW
Calgary, Alberta T2P 4A3
(403) 267-8459 (Phone)
264-9400 (Fax)

HOME PAGE: http://www.wwclawyers.com

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