Credit rating agencies: Assessment of CRA regulatory effectiveness in the EU and the U.S.

The on-going debate over how strictly the financial markets and their participants should be regulated after the outbreak of the 2008 financial crisis has brought special attention to the case of the Credit Rating Agencies. Credit Rating Agencies are fundamental for the functioning of the global financial markets. Confiding on experts with the necessary tools and experience to conduct assessments on the creditworthiness and risk of financial instruments is more effective than let investors make one by one their own credit risk assessment. For that reason, financial institutions in the EU and the U.S had for a long time relied on these agencies to evaluate the credit risk of the financial markets, granting them both regulatory powers and a high degree of leverage, while the agencies themselves remained unregulated. However, inflated ratings on debt instruments such as Mortgage-Backed Securities in the early 2000s that turned out to be worthless are among the causes of the 2008 economic crisis. The massive downgrading of Mortgage-Backed Securities following the burst of the housing market bubble in 2007 triggered the panic, causing the dry up of financial markets and the bankruptcy of many companies. Therefore, since the economic turmoil of 2008, regulators on both sides of the Atlantic agreed that stricter regulation and oversight of the Credit Rating Agencies was needed in order to avoid a similar economic disaster in the future. For that reason, a series of new regulations have been passed in both the EU and the U.S. They are intended to improve the quality and integrity of the Credit Rating Agencies by addressing the problems posed by them and that contributed to the making of the crisis. However, understanding how to fix the problems posed by the Credit Rating Agencies while preserving the useful role they play as gatekeepers of the financial markets is proving to be an arduous and complex task. In this study I will discuss the regulations towards Credit Rating Agencies introduced after the crisis in the EU and the U.S, and analyze to what extent they are effectively addressing the malfunctions of the Credit Rating industry.