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During the financial crisis of 2008, the financial markets would have been better served if the credit rating agency industry had been more competitive. We present evidence that suggests the Securities and Exchange Commission’s designation of Nationally Recognized Statistical Rating Organizations (NRSROs) inadvertently created a de facto oligopoly,...
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Credit Rating Agencies (CRAs) play a key role in the financial markets: credit rating provides useful information to investors, and it is also widely used for regulatory purposes. Nevertheless, after the subprime meltdown, CRAs have been strongly criticized for worsening the crisis by overrating structured products. Consequently, regulators are ref...
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... This category was incorporated in a number of state and federal level legal acts, regulating net capital requirements, investment and retirement funds or mortgage markets. In many cases, legislator required financial firms to use ratings from at least two NRSROs(Calabria & Ekins, 2012). ...
For decades, the credit rating market has been dominated by three major agencies (Moody's, S&P and Fitch Ratings). Their oligopolistic dominance is especially strong in sovereign credit ratings industry, where they hold a collective global share of more than 99%. Global financial crisis and the Eurozone sovereign debt crisis exposed serious flaws in rating process and forced public authorities to act. This study investigates effectiveness of new regulations adopted in the United States and in the European Union after financial crises in terms of reducing oligopolistic dominance of the “Big Three” in sovereign credit ratings market. The study applies descriptive statistical analysis of economic indicators describing concentration rate in a market, as well as content analysis of legal acts and case study methodology. Analysis shows that the Dodd-Frank reform and new European rules on supervision of credit rating agencies were not effective enough and did not lead to the increased competition in the market. The evidence from this study is explained using two alternative perspectives – economic theory of natural oligopoly and hegemonic stability theory coming from international relations field.
... These fin-tech innovations are expected to produce dramatic improvements with beneficial effects on the performance of financial operators. Actually, the dramatic underestimation of some harmful bankruptcies (Lieven, 2016) casted serious doubts on the effectiveness of prevalent methods (BCBS, 2000(BCBS, , 2005ESMA, 2015;FSB, 2014;Hemraj, 2015;Jeon & Lovo, 2013;Lieven, 2016;Malik, 2014;Mattarocci, 2014;McClintock Ekins & Calabria, 2012;White, 2010). In this perspective, the economic crisis has not determined but only accentuated a chronic inadequacy or incompleteness of standard methods. ...
... Bolton et al. (2012) and Bauer and Esqueda (2017) agree on that the monitoring indicators assigned by credit rating agencies (CRAs) reduce governments' monopoly in structuring policies, regulations and controls that stifle innovation and productivity. In addition, Morkoetter et al. (2017) findings are in line with Ekins and Calabria (2012) who report that CRAs contribute to market efficiency by providing accurate, clear and reliable assessments of the solvency of participants in the financial markets. Furthermore, Phiri (2017) emphasised that the role of rating agencies is solidly being extended to environmental, sustainabilty and governance factors which both society and investors had largely ignored. ...
... Bolton et al. (2012) and Bauer and Esqueda (2017) agree on that the monitoring indicators assigned by credit rating agencies (CRAs) reduce governments' monopoly in structuring policies, regulations and controls that stifle innovation and productivity. In addition, Morkoetter et al. (2017) findings are in line with Ekins and Calabria (2012) who report that CRAs contribute to market efficiency by providing accurate, clear and reliable assessments of the solvency of participants in the financial markets. Furthermore, Phiri (2017) emphasised that the role of rating agencies is solidly being extended to environmental, sustainabilty and governance factors which both society and investors had largely ignored. ...
... There is general consensus that a credit rating is one of the major external forces that influence financial markets by imposing financial discipline on market participants (Duygun et al., 2016) and contribute to market efficiency by providing accurate, clear and reliable assessments of the solvency of financial market participants (Ekins and Calabria, 2012). Thus, the function of credit ratings is to enhance transparency and efficiency in financial markets by reducing the information asymmetry between borrowers and lenders (Gande and Parsley, 2014). ...
... Bolton et al. (2012) claim that the monitoring indicators assigned by CRAs reduce governments' monopoly in structuring policies, regulations and controls that stifle innovation and productivity. In addition, Ekins and Calabria (2012) report that CRAs contribute to market efficiency by providing accurate, clear and reliable assessments of the solvency of participants in the financial markets. ...
... Second, credit rating methodologies are highly subjective and include key variables that are permeated by ideologically conditioned judgements and biases (Gaillard, 2014). Third, regulators create artificial demand for ratings by imposing credit ratings as part of compliance requirements for countries and corporates to issue financial market securities (Ekins and Calabria, 2012). These credit ratings are usually from a few approved international credit rating firms. ...
This thesis investigates the effects of the information provided by
credit rating agencies on financial markets in 30 African countries during the period of
1994 to 2014 in order to determine whether long-term foreign currency sovereign credit
rating announcements contain material information that influences the secondary
market stock and bond returns.
... A principal crítica das alas liberais, tanto de ordem política quanto acadêmica, prega que tais agências, fundamentalmente as três maiores, criaram um poderoso oligopólio no mercado de classificação -justamente pelo arranjo, que estabeleceu regras rígidas para regulação das agências na categoria NRSRO, restringindo a entrada de novos competidores no mercado -e por meio de incentivos governamentais criam uma demanda artificial por seus ratings. Grupos de pressão, como Catho Insitute -think tank reconhecidamente por suas proposições fundadas no libertarainismo de Hayek -ou The Library of Economics and Liberty Foundation, defendem que haja uma nova reforma regulatória que reduza o peso das agências de rating nos mercados(Ekins; Calabria, 2012). ...
O presente artigo busca interrogar o papel das agências de clas- sificação de risco de crédito e seus dispositivos na redefinição de novas regras culturais e institucionais que governam o acesso de Estados Soberanos ao crédito e investimentos via mercado de títulos públicos. Hoje, esses Estados se capitalizam através das emissões de títulos, bonds, em mercados primários e secun- dários, descentralizando a dependência de crédito de bancos e instituições multilaterais. O artigo foca no modo específico pelo qual as agências de classificação de risco de crédito, produtoras objetivas de avaliações e classificações desses Estados Sobera- nos, têm fundamentado firmemente suas posições e legitimado seus constructos de controle sobre mercados e Estados. Com base em pesquisa documental e instrumentos de análise extra- ídos das sociologias da performatividade e da classificação se pretende questionar o estatuto, adensamento de normalização e produção de standards financeiros sobre Estados Soberanos.
... Egan Jones applied in 1998 and was approved only in 2007. The SEC does not prevent non-NRSRO agencies from issuing ratings but excludes them from offering a regulatory license that is required to compete in the market place (Ekins and Calabria, 2012). Without the benefit of a NRSRO designation, any new rating agency risks being ignored by most financial institutions (the "buy side" of the bond markets). ...
This paper provides a synthesis of the literature on biases in sovereign credit ratings. Credit rating agencies favor their home countries and the homes of their major shareholders to the detriment of foreign countries. These home and foreign biases have multiple sources, each of which is especially at the disadvantage of emerging markets. While the characteristics of emerging debt markets make these countries particularly vulnerable to a downward bias in their sovereign credit rating, the consequences of a bad rating are especially severe here. A low credit rating increases borrowing costs, hampers access to international capital markets and inflates risk.
... CRCs offer predictions as to the likelihood that a particular debt instrument will be repaid, in part or whole (Ekins & Calabria, 2012). They play a key role in financial markets by helping to reduce the DOI: http://doi.org/10. ...
This paper focuses briefly on the rating activities as well as the quality of ratings as adopted by the credit rating companies based in Bangladesh. Although there are 08 rating companies currently operating in Bangladesh, this study reveals that nearly 70% of the total rating services offered by the companies as of December, 2012, were concentrated only to Credit Rating Information and Service Limited and Credit Rating Agency of Bangladesh Limited. Apart from some other challenges like clients’ undue bargaining and unusual number of issued ratings, the quality of ratings is reportedly satisfactory with high retention of investment grade ratings. In conclusion, the paper offers some significant implications based on findings.
... The credibility is possibility whether or not principal and interest of a certain security or bond are paid when due. Credit ratings can be executed both on debts of the issuers, namely general financial health of the issuers and on the assets that form a financial package as is the case of structured asset-backed securities (Ekins and Calabria, 2012). Credit rating agencies produce ratings by using certain letters and the letters symbolize the opinion of CRAs about credibility of securities or bonds at a certain date. ...
... This means that CRAs do not continuously renew the information about the securities once they rated. They assume that the evaluations they made remain relatively stable in time (Ekins and Calabria, 2012). As a matter of fact the parties that intent to hold securities for longer period of time are not interested in short-term volatility of risk in the financial markets. ...
... There are basically three reasons why CRAs have grown in importance in due course. First of all since Regulation Q of 1933 Glass-Steagall Act banned commercial banks to pay interest for checking accounts, the deposits of commercial banks had almost dried out and therefore their loans capacity was severely restricted (Ekins and Calabria, 2012). Together with this new state of affairs, demand for loans had tended to turn from commercial banking to non-commercial credit institutions. ...
The efforts for understanding the 2007 Global Financial Crisis requires more elaborated studies on the institutions, processes and other micro foundations of financial services industry instead of studies solely on mainstream business cycles theories that have obviously failed in understanding, explaining and predicting the crisis. This paper attempts to investigate whether or not credit rating agencies had played a triggering role in 2007 Global Financial Crisis. It is a study of parties, institutions and processes within financial services market. It is well documented that the credit rating agencies whose main function is to provide investors with information about the credit-worthiness of securities on which they plan to invest had hardly ever performed that function properly during the crisis. By changing their business models from ‘investor pays model’ to ‘issuer pays model’, they paved the way to conflict of interest and inevitably created chaos in financial services industry. Credit rating agencies doubtlessly are responsible for triggering the 2007 Global Financial Crisis. However it should be fair to emphasize also the responsibility of the US regulatory processes in emerging the conflict of interest in credit rating industry by giving some credit rating agencies an oligopoly power in the credit rating market and taking their credit ratings as the basic points of reference for regulatory purposes. It is obvious that the credit rating industry needs a reform.
... For example , game theory presents the idea that (short-term) rational, self-interested action from an individual actor's perspective often leads to undesirable long-term outcomes for the collective (Hardin, 1968). More generally, investigating negative externalities and the unintended negative consequences of regulations (e.g., Acemoglu & Angrist, 2001; Besley & Burgess, 2004; Friedman, 1962; Gray, 1987; Hoskisson, Castleton, & Withers, 2009; Mc- Clintock, Ekins, & Calabria, 2012; Shleifer & Vishny, 1998), economists have made great strides in shedding light on the unintended consequences of organizational activities and government interventions. (Of course, in addition to negative externalities, economics also explains and illustrates desirable unintended consequences , or positive externalities, such as the concept of the invisible hand.) ...
Is ESG in the guise of corporate social responsibility really beneficial? Unlikely because, first, the empirical evidence that ESG improves economic fundamentals is ambiguous. Second, ESG information is likely to be distorted by opportunistic virtue-signaling managers and executives. Both forces induce market noise, which typically invites more noise trading, which in turn leads to excess market volatility (among all publicly traded firms). In the current environment, it may even lead to excess valuations. If this happens on grand scale, the free market system will be distorted and undermined.
