The Regulatory Use of Credit Ratings: Overview and Conceptualization

Abstract

Credit ratings have been used for a number of public regulatory purposes in the US regulatory system and other national regulatory systems as well as in international financial market rules. In the three decades before the global financial crisis, national and international regulatory bodies made increasing use of ratings-dependent regulation. While the importance of ratings-based regulations has traditionally been particularly salient in the United States, all developed states came to use credit ratings for regulatory purposes to some extent. This chapter describes the regulatory use of credit ratings in national and international financial regulation. In a next step, the regulatory use of credit ratings is conceptualized in more abstract terms. Credit rating agencies set a private standard of creditworthiness which is made binding by a public third party when credit ratings are used in financial regulation. This public enforcement of credit rating agencies’ standard of creditworthiness constitutes a delegation of regulatory authority from public regulators (principals) to a specific type of transnational expert standard-setters (agents).KeywordsCredit RiskCredit RatingGlobal Financial CrisisPrivate RatingCredit Rating AgencyThese keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.