Some eight years on from the Credit Rating Agency Reform Act of 2006 it seems clear that this measure has achieved little in the way of substantive change in the credit rating industry. The new law did not prevent the series of rating failures that have contributed to the global financial crisis that started in summer 2007.
What lies at the heart of this regulatory ineffectiveness? The analytical processes and business model that dominates rating have not changed in any significant way, and even post-crisis regulatory efforts may come to nothing.
We contend that the failure to substantively regulate the credit rating agencies reveals much about how credit rating really works, and how the agencies interact with governments, transnational regulatory bodies, and market institutions. We offer an alternative to the widely held but simplistic view of the rating system as a product of regulation, and explore the reasons for the persistent dominance and seeming immunity of the credit rating agency oligopoly.
What are the rationales for policymakers to rely on putatively disinterested actors such as credit rating agencies (CRAs) for financial regulatory input? This paper draws on perspectives from International Political Economy and Comparative Legal Studies to analyze the reasons behind the use and retention of external ratings as an indirect instrument of financial regulation.
We find that allowing "market practice" to determine the relationship between ratings and regulation creates tautological justifications of the CRAs' authority, and raises compelling questions in terms of legitimacy.
The purpose of this paper is to uncover the constitutive elements of the tacit acquiescence underlying the subordination to CRA ratings in regulatory matters. The examination of possible conceptualizations of legitimacy may help conduct further inquiries into the politics of technocracy.
The fact that collateral whose function is to secure repayment via its attributed low credit and liquidity risk is traded prominently in a "shadow" banking environment may still go unnoticed. This article analyzes the role of credit rating agency (CRA) ratings in the construction of collateral using the example of sovereign ratings as eligibility criterion for sovereign bonds used as collateral in private and central bank repo transactions. By means of the collateral framework of the ECB, it shows how the epistemic authority of CRAs in terms of sovereign creditworthiness is `constantly being both constructed and worn away' (Sinclair 1999, p. 165) by the central bank itself.
Taking into account how sovereign ratings inform the eligibility of sovereign bonds as collateral, allows to explain the potential of sovereign rating downgrades to drain the liquidity on the interbank market, highlighting one crucial dimension of the politics of shadow banking practices.
In a simple model based on political support approach, we show that poor and less egalitarian societies may impose a lower tax rate contrary to the prediction of the median voter approach. This is consistent with the available empirical findings. In the framework developed in this paper, the government can strategically design a weak governance system to promote informal activities for the poor. This constitutes an alternative redistributive strategy other than the standard tax-transfer policy. The government chooses the tax rate and the degree of governance simultaneously to maximize the average income of the poor in the informal sector of the economy, i.e. those who constitute the majority and help in winning the election.
We use individual U.S. commercial bank balance sheet information to develop stylized
facts about bank behavior in both the cross section and over time. We then build a quant-
itative model of bank behavior taking as exogenous inputs the aggregate and idiosyncratic
components of problem loans, interest rate spreads and deposit shocks, seeking to under-
stand decisions regarding new loans provision, access to wholesale funding and defaults. The
model generates highly procyclical loan supply and banks can curtail new lending very ag-
gressively in response to background risk shocks, such as an increase in bad loans. Bank
failures, though, are strongly countercyclical. Relative to a baseline recession, in a reces-
sion simultaneously accompanied by a temporary freeze in the money market, bank defaults
increase by a factor of three and credit supply drops by 2.5 percentage points more.
Every year 400,000 entrepreneurs fail and 60,000 file for personal bankruptcy. The option to declare bankruptcy provides entrepreneurs with insurance against the financial consequences of business failures. However, it comes at the cost of worsened credit market conditions. In this paper, we construct a quantitative general equilibrium model of entrepreneurship to show that the presence of secured credit in addition to unsecured credit substantially alters the trade-off between insurance and credit conditions. A lenient bankruptcy law always worsens credit conditions, in particular for poor entrepreneurs. If secured credit is not available, their credit conditions are so bad that many prefer to become workers. In that case, we show that the optimal bankruptcy law is very harsh because the benefits from better credit conditions dominate the worsened insurance. However, if secured credit is available, entrepreneurs who might be rationed out of the unsecured credit market can still obtain secured credit. Therefore, they can run larger firms, which makes entrepreneurship more attractive. Since the presence of secured credit lowers the cost of a generous bankruptcy law, we find that the optimal law is lenient in this case:
moving to the optimal bankruptcy law would increase entrepreneurship by more than four per cent.
We use individual U.S. commercial bank balance sheet and income statement information
to develop stylized facts about bank portfolio choices in both the cross section and over
time. We then estimate the structural parameters of a quantitative model of bank portfolio
choices (new loans, liquid investments and endogenous failure) that are made in the presence
of undiversi?able background risk (problem loans, interest rate spreads and deposit shocks)
and regulatory constraints. The loan portfolio is highly procyclical and banks curtail new
lending very aggressively in response to background risk shocks, such as a higher uncertainty
in bad loans or deposits. Bank failures are strongly countercyclical and depend positively on
leverage. Increasing equity requirements generates higher equity but also results in higher
failures because the increase in equity is less than proportional to the increase in the leverage
limit, whereas background risk remains the same.
