Abstract
The ethical practices of credit rating agencies (CRAs), particularly following the 2008 financial crisis, have been subject to extensive analysis by economists, ethicists, and policymakers. We raise a novel issue facing CRAs that has to do with a problem concerning the transmission of epistemic status of ratings from CRAs to the beneficiaries of the ratings (investors, etc.), and use it to provide a new challenge for regulators. Building on recent work in philosophy, we argue that since CRAs have different stakes than the beneficiaries of the ratings in the ratings being accurate, what counts as knowledge (and as having ‘epistemic status’) concerning credit risk for a CRA may not count as knowledge (as having epistemic status) for the beneficiary. Further, as it stands, many institutional investors (pension funds, insurance companies, etc.) are bound by law to make some of their investment decisions dependent on the ratings of officially recognized CRAs. We argue that the observation that the epistemic status of ratings does not transmit from CRAs to beneficiaries makes salient a new challenge for those who think current regulation regarding the CRAs is prudentially justified, namely, to show that the harm caused by acting on a rating that does not have epistemic status for beneficiaries is compensated by the benefit from them acting on a CRA rating that does have epistemic status for the CRA. Unlike most other commentators, therefore, we offer a defeasible reason to drop references to CRAs in prudential regulation of the financial industry.
Highlights
In the aftermath of the global financial crisis, various governmental committees, journalists, economists, and ethicists have scrutinized the ethics of the credit-rating agencies (CRAs) (e.g., De Bruin 2017; Pagano and Volpin 2010; Scalet and Kelly 2012; Strier 2008)
Since CRAs have different stakes than the beneficiaries of the ratings in the ratings being accurate, what counts as knowledge concerning credit risk for a CRA may not count as knowledge for the beneficiary
We argue that if the law is to continue to make investment decisions dependent on the CRAs in contexts where stakes sensitivity arises it is incumbent on the defenders of the law to demonstrate that the harm this may cause investors is compensated by the benefit from investors acting on CRA ratings that have epistemic status for the CRA
Summary
In the aftermath of the global financial crisis, various governmental committees, journalists, economists, and ethicists have scrutinized the ethics of the credit-rating agencies (CRAs) (e.g., De Bruin 2017; Pagano and Volpin 2010; Scalet and Kelly 2012; Strier 2008). By using insights from the economics and sociology literatures on CRAs we have seen that because of historical and legal developments, CRAs as we know them today have three functions: they publish judgements about credit risk; they monitor issuers through implicit contracts; and they provide directives to institutional investors.
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