Regulation of Credit Rating Agencies: Evidence from recent crisis

by Mai Hassan of the German University in Cairo, and
Christian Kalhoefer of the German University in Cairo

February 2011

Abstract: The importance of ratings for investors' decisions and for the perceptions of the financial health of a nation pointed out the need that credit rating agencies should be regulated in some way. Regulators and market participants believed that the credit rating agencies need to abide by standards of corporate governance and supervision due to their pivotal role in the US subprime crisis. This belief was amplified recently because the rating agencies were deeply involved in the European debt crisis after various sovereign debt ratings were significantly downgraded. Therefore, the paper highlights the critique against the agencies' role in the two most recent crises and reviews the regulation proposals which subject the rating agencies to behavioral standards.

JEL Classification: G15, G24, G38.

Keywords: Credit rating agencies, subprime, Euro crisis

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