External Credit Assessment Institutions: Clash of Expectations and Accountability Issues

Abstract

External Credit Assessment Institutions (ECAI) alleged to have provided faulty credit ratings to Enron in 2001 prompted a measured US legal response. ECAIs are said to have played an enabling role in the 2008 global financial crisis (GFC) to raise questions over the effectiveness of this early regulatory initiative. The EU also responded, albeit later, as a direct response to the GFC. External gatekeepers at various levels have been widely criticised in the ongoing GFC, with some facing serious litigation, but ECAIs have got off relative lightly in relation to these others, considering the important role they played in the crisis. This has led to massive appeals to hold ECAIs more accountable. The main ECAIs have consistently and effectively disclaimed liability and staved off litigation proceedings, while detractors have argued that, as gatekeepers and more, ECAIs should be held more accountable for their flawed ratings. This gives rise to performance expectation and accountability gaps between the two. This paper briefly traces and suggests reasons for this, and focuses on the analysis of current legal reforms with suggestions for enhancing legal accountability.