Introduction

There is a broad consensus that credit rating agencies (CRAs) contributed to the current financial crisis, which began in the United States (US) in summer 2007 with problems in the subprime mortgage market and has since taken on global dimensions. The agencies underestimated the credit risk associated with structured credit products and failed to adjust their ratings quickly enough to deteriorating market conditions. CRAs were accused of both methodological errors and unresolved conflicts of interests, with the result that market participants' confidence in the reliability of ratings was seriously shaken. It is unsurprising, against this backdrop, that a heated debate emerged about the rating process, rating agencies, competition, and liability rules, prompting calls by politicians for greater regulation of CRAs.

Yet such calls are not solely a product of the present financial turmoil. They have featured on the agenda of international financial market policy since, if not before, CRAs came under fire in the wake of the series of debt crises starting in 1997. Nevertheless, there was no rush to take legislative action. On the contrary, the Code of Conduct Fundamentals for Credit Rating Agencies, published by the International Organization of Securities Commissions (IOSCO) in 2004, sent a clear signal that policymakers preferred a self-regulatory approach. And this approach appeared to be successful inasmuch as all the big CRAs subscribed to the Code. In the European Union (EU), the approach was supported by a consensus between the Committee of European Securities Regulators (CESR) and the European Commission that regulation should be put on hold for the time being. This strategy was especially remarkable given that 2006 saw the Credit Rating Agency Reform Act subject CRAs in the US to state regulation for the first time.

The phase of self-regulation has now come to an end with the adoption in the EU of the Regulation on Credit Rating Agencies. Since the financial crisis began, policymakers in Europe at both national and European levels have been consistently self-confident in calling for Europe to lead the way in international financial market regulation. This paper will examine whether and, if so, to what extent this ambition conflicts with the need for any steps to improve financial stability—be they in the form of legislation or self-regulation—to be based on coordinated international action.

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