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eBook details

• Title: Enhancing the Accountability of Credit Rating Agencies: The Case for a Disclosure-Based Approach (Canada)
• Author : McGill Law Journal
• Release Date : January 22, 2006
• Genre: Law,Books,Professional & Technical,
• Pages : * pages
• Size : 390 KB

Description

Credit rating agencies ("CRAs") play a vital role in enabling financial markets to operate efficiently by acting as informational intermediaries specializing in the appraisal of the creditworthiness of corporations that issue debt. Despite their importance, however, rating agencies remain unregulated private institutions. The recent wave of corporate scandals has led many to call their contribution to market efficiency into question. In light of such criticism, studies conducted by lawmakers and regulators sought to further examine the role and effectiveness of CRAs. Although the studies revealed no particular wrongdoing, they warned of potential problems that could disrupt the smooth operation of capital markets. These problems relate to the reliability and integrity of ratings, as well as to possible anti-competitive practices on the part of CRAs. These potential problems are worrisome given that CRAs wield considerable power over issuers and investors. Fundamentally, the mare theme underlying the criticism of CRAs relates to their accountability towards market participants. In a perfectly functioning market, the fact that CRAs have such significant power would not elicit such concern since they would be accountable to both issuers and investors. The real world departs from this ideal and market failures may lead to a divergence between, on the one hand, the interests of CRAs, and, on the other hand, those of issuers and investors. A review of the legal and institutional environment indicates that there is a dearth of mechanisms designed to offset these market failures. Reputation is the primary mechanism that acts to restrain opportunistic behaviour on the part of rating agencies. Thus, a potential accountability gap exists, leading to an imbalance between CRAs' power, and the likelihood of holding them responsible for their use of this power.

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