TY - JOUR

T1 - Regulating rating agencies: A conservative behavioural change

AU - Jones, Laurence

AU - Alsakka, Rasha

AU - ap Gwilym, Owain

AU - Mantovan, Noemi

PY - 2022/6

Y1 - 2022/6

N2 - We investigate whether the European regulatory reforms of the credit rating industry have been successful in improving the quality of financial institutions’ credit ratings. A shift to more conservative rating behaviour rather than rating quality improvement is identified, which is attributable to increased regulatory scrutiny. This change leads to a reduction in rating inflation and an increase in the number of unwarranted downgrades and false rating warnings in the post-regulatory period. A significant decrease (increase) in the informativeness of rating downgrades (upgrades) is evident. Our findings contrast with prior evidence for US corporates where reputational effects dominated.

AB - We investigate whether the European regulatory reforms of the credit rating industry have been successful in improving the quality of financial institutions’ credit ratings. A shift to more conservative rating behaviour rather than rating quality improvement is identified, which is attributable to increased regulatory scrutiny. This change leads to a reduction in rating inflation and an increase in the number of unwarranted downgrades and false rating warnings in the post-regulatory period. A significant decrease (increase) in the informativeness of rating downgrades (upgrades) is evident. Our findings contrast with prior evidence for US corporates where reputational effects dominated.

KW - EU regulation of rating agencies

KW - Rating quality

KW - Rating conservatism

KW - Disciplining hypothesis

KW - Reputation hypothesis

U2 - 10.1016/j.jfs.2022.100999

DO - 10.1016/j.jfs.2022.100999

M3 - Article

VL - 60

JO - Journal of Financial Stability

JF - Journal of Financial Stability

SN - 1572-3089

M1 - 100999

ER -