Regulating Ratings

The leading credit rating agencies Moody’s, Standard & Poor’s and Fitch have recently gained prominence in the financial markets as rating scandals tarnish their reputation. After a century of being left quasi unregulated, the credit rating industry is now being subjected to sweeping postcrisis reforms. In fact, regulating the raters is considered a crucial aspect of financial reform. This study analyzes the credit rating agency reforms in the United States and the European Union. It focuses on the interaction between regulatory intervention and competitive incentives. The objective is to understand how the leading credit rating agencies have become ever more profitable even though they have repeatedly failed to provide investors with reliable information.