Public Policy

The 2008 financial crisis highlighted the critical role that credit rating agencies (CRAs) play in global capital markets. Post-crisis, policymakers on both sides of the Atlantic have introduced a wide range of new regulations intended to improve the oversight or regulation of CRAs. In the United States, Congress passed the Dodd-Frank Act hoping to increase CRA oversight and reduce conflicts of interest, while increasing disclosure requirements. Meanwhile, the European Commission pursued two rounds of legislation focused on mitigating conflicts of interest, enhancing transparency and empowering a new pan-European supervisor.

Concerned about the role that CRAs played in the European sovereign debt crisis, the European Commission on November 15, 2011, proposed a third round of significant amendments to existing EU regulations - referred to as CRA3. While the stated intention of CRA3 is to further increase competition, accountability and transparency, there are questions regarding the efficacy and unintended consequences of the proposals, which may have an impact not just in Europe but throughout global debt markets.

In partnership with the International Centre for Financial Regulation (ICFR), the Center for Financial Markets at the Milken Institute convened a roundtable discussion in Paris to discuss in depth the merits and potential pitfalls of the proposed regulations. The roundtable participants included a diverse group of stakeholders, including institutional investors, corporate issuers, regulatory officials, legal experts, ratings agencies, special advisors to sovereigns and financial institutions, and academics.

While views differed on various aspects of the proposed regulations, concerns were expressed that in many instances the proposed regulations could have the opposite effect of that intended by policymakers - that is, increased costs to issuers or investors, reduced quantity and quality of ratings, and the balkanization of global regulations. The aggregate effect of these outcomes could reduce the depth and liquidity of capital markets. The participants largely agreed, therefore, that the proposed CRA3 required further consideration before adoption by the European Parliament and the Council of Ministers.

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