Credit Rating Agencies

This contribution to the Working Paper Series of the Dutch central bank critically reviews the academic debate on the position and power of Credit Rating Agencies (CRAs) and, in the light thereof, analyses the European regulatory approach to CRAs, thereby combining insights from economics and law. Thereafter, the focus turns to the two main tasks for which CRAs have come under criticism, namely the issuing of sovereign ratings and the rating of structured instruments. Finally, the question of whether and how CRAs should be regulated given their function is discussed, focusing on recent European legislation that aims to standardize the conducts of CRAs. The theme of this contribution is linked to the ESL research program 'Rethinking the Rule of Law in an Era of Globalisation, Privatisation, and Multiculturalisation' and in particular the subprogram 'Decrypting the Public Power Paradigm in Denationalising and Privatising Legal Orders'. In the context of the global financial crisis and the euro area crisis CRAs have come under heavy criticism for the extent of power which they have over developments in the financial markets. As such CRAs highlight that macroeconomic policy is not only denationalized as a result of Europeanization and globalization, but also subject to the action by private, profit-oriented, actors. In some instances these actors actually take an active role in the exercise of public power, as is the case with regard to credit ratings that are used for regulatory purposes. The question that arises in this context is whether and under what conditions such a private involvement should be allowed.