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Was Regulation (EC) No 1060/2009 on Credit Rating Agencies effective?

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This paper is dedicated to my greatest friend, Claire (1991–2015).

She was the most brilliant, open-minded, and tolerant person I have ever met.

She was like a sister for me.

Olivier Nataf

Abstract

The purpose of this paper is (1) to put the Regulation (EC) No 1060/2009 on Credit Rating Agencies (henceforth, CRA I) into historical perspective, including a comparison with the Dodd–Frank Act, and (2) to examine whether the CRA I Regulation effectively influenced the ratings issued by credit rating agencies in EU financial markets. This paper presents a historical review of regulations existing prior to the 2007 crisis and describes the mechanisms put in place after the event both in the USA and the EU. Following this part, two ordered logistic regressions based on a sample of ratings attributed to Eurozone companies examine the influence of CRA I on the rating process. A study of the repercussions of Regulation (EC) No 1060/2009 on ‘false warnings’ issued by rating agencies is finally presented in the last section of this paper. The regressions point out that CRA I had a double impact on how rating agencies use financial, accounting and geographical indicators during the rating process, as it influenced (1) the grading process and (2) the magnitude of the up- or downgrades. It is also underlined in this study that the regulation had no significant influence on ‘false warnings’. The findings of this study may help EU regulators to better design future regulations on rating agencies and to curb weaknesses of CRA I that were not addressed by ‘CRA II’ (2011) and ‘CRA III’ (2013) regulations. To our knowledge, this paper is the first one to examine the efficiency of the CRA I regulation and to adopt a European-oriented approach by focusing on Eurozone members.

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Notes

  1. Only three observations were (partially) collected from other sources: one from the financial statements of the company and the other ones from the BELFIRST database (Bureau van Dijk).

  2. As Moody’s uses different non-numerical variables (such as expectations about the future financial policy of the company) among industrial sectors, we only kept common numerical data in the scope of this study.

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Author information

Authors and Affiliations

  1. Faculty of Economic and Social Sciences and Solvay Business School, Vrije Universiteit Brussel, Pleinlaan 2, 1050, Brussels, Belgium

    Olivier Nataf & Lieven De Moor

  2. Faculty of Economics and Business/Finance, Accountancy and Tax, KU Leuven, Campus Brussels, Warmoesberg 26, 1000, Brussels, Belgium

    Rosanne Vanpée

Authors
  1. Olivier Nataf
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  2. Lieven De Moor
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Correspondence to Olivier Nataf.

Appendices

Appendix 1

See Table 9.

Table 9 Timeline of EU and US regulations
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Appendix 2

See Table 10.

Table 10 Correlation matrix
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Nataf, O., De Moor, L. & Vanpée, R. Was Regulation (EC) No 1060/2009 on Credit Rating Agencies effective?. J Bank Regul 19, 299–316 (2018). https://doi.org/10.1057/s41261-017-0059-7

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