Regulating Credit Ratings Agencies: Where to Now?

Journal of Financial Transformation, Volume 31, March 2011

12 Pages Posted: 2 Aug 2012

See all articles by Amadou Nicolas Racine Sy

Amadou Nicolas Racine Sy

International Monetary Fund (IMF) - International Capital Markets Department; Brookings Institution

Date Written: 2011

Abstract

This paper reviews current proposals to regulate credit rating agencies. The proposals can be classified in two broad areas: (1) micro- and (2) macro-prudential measures. While the previous regulations relied on micro-prudential measures, experience from the U.S. subprime crisis and the European sovereign debt crisis shows that such an approach did not address the negative externalities from credit ratings, prompting the need to expand the regulatory perimeter. This paper highlights two types of macro-prudential regulation: (i) those that attempt to take credit ratings out of regulation such as Section 939A of the 2010 Dodd-Frank Act and (ii) those that aim to reduce the importance of credit ratings in regulation such as the recent changes to the ECB collateral rules. This paper argues, however, that it remains important that policymakers conduct formal assessments of the impact of the use of credit ratings on financial markets. This can be done through stress tests of institutions that would be affected by rating downgrades. Additional capital requirements and/or liquidity buffers could be used if necessary to mitigate the systemic risk of credit ratings.

Keywords: Credit rating agencies, Dodd-Frank, regulation, Section 939A, ECB, collateral rules

JEL Classification: G1, G18, G24, G28

Suggested Citation

Sy, Amadou Nicolas Racine, Regulating Credit Ratings Agencies: Where to Now? (2011). Journal of Financial Transformation, Volume 31, March 2011, Available at SSRN: https://ssrn.com/abstract=2121537 or http://dx.doi.org/10.2139/ssrn.2121537

Amadou Nicolas Racine Sy (Contact Author)

International Monetary Fund (IMF) - International Capital Markets Department ( email )

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Brookings Institution ( email )

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