Regulating Credit Rating Agencies in the European Union: Lessons from Behavioural Science
The Dovenschmidt Quarterly 2013, No.1 (Forthcoming)
36 Pages Posted: 7 Dec 2012
Date Written: December 5, 2012
Since the beginning of the global financial and economic crisis, the search for its causes has been in full flight on both sides of the Atlantic. Inter alia, fundamental failures in the evaluation of risk and the role that Credit Rating Agencies (CRAs) play in the assessment of credit risk are discussed. More specifically, the question is raised as to what the role of CRAs is in the financial markets, why this role may be problematic and how the main weaknesses of the present system can be addressed in the European Union (EU) and elsewhere. This contribution does not aim to provide a discussion of all theoretical aspects that might be involved in an economic analysis of CRAs, but to better understand the main behavioural economics and normative arguments that may be related. Thereby, the current EU regulatory framework on CRAs and credit ratings will be scrutinized. The basic hypothesis of this contribution is that the current and proposed future EU regulatory framework does not fully succeed in effectively tackling failures in the CRA market, because insights from behavioural economics are widely neglected.
Keywords: Credit Rating Agencies, European Union, Regulation, Behavioural science, behavioural economics, rating methodology, lulling effect, neuroeconomics, herd behaviour, psychology of advice, overreliance, due diligence, De Larosière Report, Capital Requirements Directive, ESMA, Regulation 1060/2009
JEL Classification: G21, G18
Suggested Citation: Suggested Citation