Civil Liability of Credit Rating Companies: Quantitative Aspects of Damage Assessment from an Economic Viewpoint
Forthcoming, Special Issue of International and Comparative Corporate Law Journal, on Civil Liability of Credit Rating Agencies in the European Union - Selected Legal and Economic Aspects, edited by Gudula Deipenbrock and Mads Andenas
Posted: 9 Jan 2015 Last revised: 8 Dec 2015
Date Written: January 8, 2015
Credit Rating Agencies (CRAs) are among the scapegoats who are blamed for the most recent financial crises. Originally criticized for “too optimistic” ratings (of ABS issues), the same rating agencies were blamed for being over-cautious during the European sovereign debt crisis, when they initiated downgrades of several countries. Unsurprisingly, sit did not take politicians long to start thinking of a liability regime for erroneous ratings at the European level, what ended up in a liability rule as a part of the European Union (EU) credit rating agency regulation CRA III. But how liable could and should credit rating agencies be for their “opinions”? This paper addresses quantitative aspects of the problem from an economic point of view. First, a theoretical model for the design of an optimal liability regime for credit rating agencies is introduced. Hereafter, the impact of ratings on the valuation of securities in practice is explained. Two fictive cases of quantifiable damage caused by an inappropriate rating are presented and the pecuniary loss under EU CRA III is calculated. Finally, the shortcomings of the current liability regime are illustrated from an economic viewpoint. The paper concludes with proposals for improvements towards an effective liability regime in the EU.
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