Trying or Failing Better Next Time? - The European Legal Framework for Credit Rating Agencies after Its Second Reform

Abstract

Between 2009 and 2013 the European Union ( Union) introduced a regulatory and supervisory regime for credit rating agencies (CRAs) and reformed it twice. The Union left the path of industry self-regulation triggered by the financial crisis with its first peak in autumn 2008, the collapse of Lehman Brothers. The turmoil brought to the financial markets prevailed upon the Union at the same time to redesign the supervision of the European financial market fundamentally by introducing a new European System of Financial Supervision (ESFS). The Union's approach to financial market regulation has changed radically in the wake of the recent financial market crises. The Union continues to face far-reaching changes on its way to an 'ever closer' capital market with pivotal projects such as the banking union on its agenda. This paper discusses the Union's regulatory approach to the credit rating sector. It introduces critically the various legal acts forming the regulatory and supervisory regime for CRAs in the Union with a particular focus on its second reform. The paper explores whether the Union is on track to adequately address the main dysfunctions of the credit rating sector which remained unresolved: the overreliance on credit ratings, the oligopolistic structure of the credit rating sector, the civil liability of CRAs, the conflicts of interest, sovereign rating and a further enhancement of the quality of credit ratings. The paper argues that the regulatory framework for CRAs after the second reform appears to have only marginally improved thereby limiting its potential to achieve its ambitious goals. The analysis of the sector-specific, regulatory developing lines in the credit rating market as presented in this paper might also be considered to exemplify some of the general legal (- practical) challenges in the realm of European financial market law.