What Reforms for the Credit Rating Industry?

Credit rating agencies (CRAs) are under scrutiny for failing to both anticipate financial crises since the late 1990s and manage their conflicts of interests when assigning ratings to structured products. This article presents an overview of the past and present reforms regarding the credit rating industry. It also makes proposals for regulatory reform. Five areas are worth examining: i) the reliance on CRA ratings in standards, laws and regulations, ii) the competition in the credit rating industry, iii) the conflicts of interests, iv) the controls over the rating methodologies and the rating process, and v) the civil liability of CRAs.

This article considers that alternatives to the use of credit ratings in financial regulations are possible in the sovereign rating area. It recommends a tighter supervision of structured products ratings and proposes a new regulatory framework to prevent conflicts of interests. It concludes that CRA ratings cannot be a substitute for institutional investors’ due diligence.