Working Paper: CEPR ID: DP7328
Authors: Marc Flandreau; Norbert Gaillard; Frank Packer
Abstract: During the 1930s, rating agencies took up a central role in regulatory supervision that they still have today. We study the process through which they received this regulatory license. The proximate cause for this changeover was the economic shock of the Great Depression. Exploring the performance of rating agencies in assessing the risks of sovereign debt, an important segment of the bond market, we show that superior forecasting capacities cannot explain the agencies? growing importance. We argue that the agencies? perceived lack of conflicts of interest (in contrast to other financial intermediaries) was a major factor in bringing them to the forefront of a new regulatory regime.
Keywords: Great Depression; Rating Agencies; Regulatory License; Sovereign Debt
JEL Codes: F34; G28; N2; N40
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Economic shock of the Great Depression (N13) | Regulatory shift enhancing the status of rating agencies (G18) |
| Perceived reliability of ratings (D80) | Acceptance of ratings as a regulatory tool (G18) |
| Reliance on ratings (G24) | Regulatory acceptance during the crisis (G28) |
| Perceived reliability of ratings (D80) | Actual performance during the crisis (H12) |