Abstract
Although not designed for that purpose, privately produced credit ratings have become a popular tool used by regulators of financial intermediaries. However, not only the recent processes of the financial crisis have shown that the delegation of governance to credit ratings has become too widespread, and is fundamentally flawed. Besides an economic analysis of the status quo of financial regulation via credit ratings, and crisis-driven political initiatives that try to improve the regulatory framework, we discuss four alternative methods of credit risk assessment. By these means it could be possible to find a way to reduce the mechanistic reliance on credit ratings, thus improving the quality of regulation and promoting financial institutions' own credit risk assessment.
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