Market Power in the Credit Rating Industry: State of Play and Proposal for Reforms

CPI Antitrust Chronicle, January 2014 (2)

11 Pages Posted: 10 Feb 2014

See all articles by Bertrand Candelon

Bertrand Candelon

University of Maastricht - Department of Economics

Axel Gautier

University of Liege - Research Center on Public and Population Economics; Catholic University of Louvain (UCL) - Center for Operations Research and Econometrics (CORE)

Nicolas Petit

University of Liege - School of Law; Hoover Institution

Date Written: February 9, 2014

Abstract

In recent years, the Credit Rating Agencies (“CRAs”) have been in the eye of the storm. Some argue that CRA rating errors — symptomatized by rating inflation or deflation — originate in excessive competition. This paper argues that the low level of competition in credit rating is a better explanation for rating this phenomenon. To show this, the present paper is divided in seven sections. Section II gives a brief overview of the credit rating industry. Section III describes CRAs rating errors, focusing on rating inflation and deflation. Section IV argues that the cause of rating inflation and deflation is due to CRAs’ significant market power, in a sector where the process of competition by reputation fails to work. Section V looks at structural features of the industry specifically in the context of conflicts of interests. Section VI argues that more competition in credit rating services is warranted, reviews recent regulatory changes that purport to promote competition, and offers additional suggestions for reform, while Section VII concludes.

Keywords: credit rating agencies; financial markets; rating inflation; competition; market power; oligopoly; economic cycle

JEL Classification: K21; L40; N2; G00; O16

Suggested Citation

Candelon, Bertrand and Gautier, Axel and Petit, Nicolas, Market Power in the Credit Rating Industry: State of Play and Proposal for Reforms (February 9, 2014). CPI Antitrust Chronicle, January 2014 (2). Available at SSRN: https://ssrn.com/abstract=2392989

Bertrand Candelon

University of Maastricht - Department of Economics ( email )

P.O. Box 616
Maastricht, 6200 MD
Netherlands

Axel Gautier

University of Liege - Research Center on Public and Population Economics ( email )

Boulevard du Rectorat, 7, Batiment 31
Sart-Tilman
B-4000 Liege, 4000
Belgium

Catholic University of Louvain (UCL) - Center for Operations Research and Econometrics (CORE) ( email )

34 Voie du Roman Pays
B-1348 Louvain-la-Neuve, b-1348
Belgium
+32-10-47.43.01 (Fax)

Nicolas Petit (Contact Author)

University of Liege - School of Law ( email )

B-4000 Liege
Belgium

Hoover Institution ( email )

Stanford, CA 94305
United States

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