A Strict Liability Regime for Rating Agencies

41 Pages Posted: 15 Mar 2014

See all articles by Alessio M. Pacces

Alessio M. Pacces

Amsterdam Law School / Amsterdam Business School; European Corporate Governance Institute

Alessandro Romano

Yale Law School

Date Written: March 6, 2014

Abstract

This paper argues that a mitigated strict liability regime can incentivize Credit Rating Agencies (CRAs) to produce ratings as accurate as the available forecasting technology allows. A damage cap based on objective factors is introduced in order to avoid crushing liability. Moreover, CRAs are allowed to choose how much to commit to their predictions. CRAs may opt out of liability even entirely, unless their ratings are relevant for regulation. Finally, corrections in the relevant timeframe for the imposition of liability are introduced in order to protect CRAs from systemic risk.

Keywords: law & economics; financial regulation; rating inflation; probability of default; crushing liability; imperfect foresight; systemic risk; structured finance

JEL Classification: G01; G24; K13; K22

Suggested Citation

Pacces, Alessio Maria and Romano, Alessandro, A Strict Liability Regime for Rating Agencies (March 6, 2014). European Corporate Governance Institute (ECGI) - Law Working Paper No. 245/2014. Available at SSRN: https://ssrn.com/abstract=2405509 or http://dx.doi.org/10.2139/ssrn.2405509

Alessio Maria Pacces (Contact Author)

Amsterdam Law School / Amsterdam Business School ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands

HOME PAGE: http://www.uva.nl/profiel/p/a/a.m.pacces/a.m.pacces.html

European Corporate Governance Institute ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http://https://ecgi.global/users/alessio-pacces

Alessandro Romano

Yale Law School ( email )

New Haven, CT
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
547
Abstract Views
2,249
rank
48,771
PlumX Metrics