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Credit rating agencies have been criticized for their role in the financial crisis by understating credit risk. The US subprime mortgage crisis highlighted the systemic relevance of the rating agencies and the deficiencies in their activities; this led to an international consensus to regulate the rating business. Written by those involved in developing European Legislation, this book explains EU Regulation in the context of global initiatives undertaken by the G-20, the Financial Stability Board, and IOSCO to address failures within the rating industry. Through an in-depth analysis of the EU Regulation's requirements on governance, conflicts of interest, methodologies, and transparency, the book provides a clear explanation of how rating agencies operate and how the identified failures have been addressed. Moreover, it examines the supervisory and enforcement powers of ESMA, the EU authority in charge of the registration and oversight of rating agencies. This is complemented with an analysis of guidance from supervisors (ESMA and EBA), IOSCO's recommendations, and US legislation. The book discusses possible new regulatory developments in areas such as the agencies' business model, competition, civil liability, and ratings of sovereign debt, in light of the Euro debt sovereign crisis. It concludes with the authors' support for an enhanced regulatory and oversight coordination at international level and for the implementation of the necessary steps to reduce the existing over-reliance on ratings.

øŠAline Darbellay analyzes the obvious system relevance of credit rating agencies in depth and assesses the possible options for regulatory responses to this systemic issue. Thereby, the book is based on a fruitful comparative legal approach and formul

Credit rating agencies play an essential role in the modern financial system and are relied on by creditors and investors on the market. In the recent financial crisis, their power and reliability were often questioned, yet a simple rating downgrade could threaten to bankrupt a whole country. This book examines the governance of credit rating agencies, as expressed by their ability to fairly, ethically and consistently assign higher rates to issuers having lesser default risks. However, factors such as the drive for increased revenue and market share, the inadequate business model, the inadequate methodology of assessing risk, opacity and inadequate internal monitoring have all been identified as critical governance failures for credit agencies. This book explores these issues, and proposes some potential solutions and improvements. This will be of interest to researchers and advanced students of corporate finance, finance, financial economics, risk management, investment management, and banking.