Regulating credit rating agencies in a transatlantic dialogue

The sub-prime crisis has underlined the ‘accountability gap’ in the credit rating agencies (CRAs) industry, constituted by an imbalance between the CRAs’ power and the possibility to hold them responsible. Reputational sanctions are less effective in the highly concentrated rating industry and the lack of case law clearly indicates that liability issues do not play a role and that the law of damages cannot ensure a fair distribution of the burden in misconduct cases. This paper aims at investigating the optimal CRAs regulatory and supervisory structure in the European Union (EU). The purpose is to assess the possibility of enhancing the credibility of CRAs by means of a regulation adequate to reinforce market incentives and enforcement policies. In particular, the paper addresses the analysis of the trade-off between, on one hand, opening up the CRAs’ industry to all potential entrants and, on the other hand, keeping the CRAs certified status and the requirement of registration and oversight as a condition for conducting their activities. An appropriate regime of registration may allow increased competition by the entrance of smaller, specialised and/or foreign CRAs.