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2 An Optimal Global Regime for Regulating Credit Rating Agencies in the Post-Financial Crisis Era

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Chapter Summary

Credit rating agencies (CRAs) are in the business of providing credit ratings for securities and other debt-related instruments. This chapter introduces the causes of CRAs' problems with conflicts of interest, and observes global approaches in dealing with such problems and comment on their effectiveness. It examines the appropriate role of the CRA in the capital markets, and presents proposals for regulatory reform in accordance with the identified status of the CRA. The chapter argues that the handicapping system based on the performance statistics invokes a sanction to deter conflicts of interest in the credit rating industry. Such a system stimulates rating agencies' incentive to engage in a degree of self-regulation and to scrutinize new offerings more closely and to downgrade in a more proactive manner. Such a system would also benefit new players entering the credit rating industry build a track record that enables them to compete with established agencies.

Keywords: capital markets; credit rating agencies (CRAs); credit ratings; debt-related instruments; handicapping system



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