‘Who Rates the Raters?’ The Regulation of Credit Rating Agencies in the EU

Abstract

Recent regulatory measures in the EU give reason to scrutinize the rules by which credit rating agencies have to abide. The article explains the functioning and the previous regulation of credit rating agencies. Since this regulation has proved to be insufficient in preventing the failure of rating agencies in the financial turmoil, the EU took regulatory measures by adopting Regulation 1060/2009 on credit rating agencies (subsequently referred to as CRA Regulation) and recently proposed amendments, thereby addressing the main failures of the credit rating industry: conflicts of interest, lack of transparency and weaknesses in the methods and models used by credit rating agencies. Despite well-founded criticism concerning details, the article finds that the EU principally took a well-balanced approach by leaving credit rating a private, but regulated, business. However, the Commission should reconsider one aspect of the regulatory concept that seems to be flawed: the instrumentalization of credit ratings for regulatory purposes and the limitation of the scope of the CRA Regulation thereon. Concluding observations illustrate the Regulation's integration in the broader context of the developing European financial market regulation.