Credit rating agencies: The development of global standards

The global financial crisis exposed some of the regulatory and market failures of a more and more globalized financial system and led to farreaching discussions about a broad range of academic and policy issues on the regulation of financial services. While the causes of the financial crisis remain controversial, one factor clearly deserves our attention: The lack of substantive principles and ‘hard law’ in the international financial architecture and its accompanying regulatory apparatus, particularly regarding cross-border financial institutions, such as credit rating agencies (hereafter ‘CRAs’). CRAs are major players in today’s financial markets, with ratings having a direct impact on the actions of investors, borrowers, issuers, and governments. The ‘Big Three’ global CRAs - the US-based Standard and Poor’s and Moody's, and the dual-headquartered (in New York and London) Fitch Ratings - have been under intense scrutiny. They were initially criticized for their favorable pre-crisis ratings of insolvent financial institutions like Lehman Brothers, as well as risky mortgage-related securities that contributed to the collapse of the US housing market. Since the spring of 2010, CRAs have focused on US and European sovereign debt. That resulted in Standard and Poor’s unprecedented downgrade of the US’ long-held triple-A rating in August 2010. Greece, Portugal, and Ireland have all been downgraded to ‘junk’ status. As the current Eurozone crisis highlights, a sovereign downgrading can have vast implications not only in the financial markets, but also for the respective state itself.However, financial multi-polarity and re-regulation make global regulatory consolidation and full harmonization from a top-down approach in the CRAs industry an even more distant prospect than was the case before the crisis. It would be easier to harmonize when one country or one bloc dominates than when many diverging voices need to concur for a decision to be made; the latter being a condition more conducive to global regulatory fragmentation than the achievement of global standards.