This Thesis investigates the recent regulatory reforms applied to the credit ratings industry in Europe and the US. It analyses the impact on credit rating agencies (CRAs) and financial markets. The prior literature on CRA regulation is focused on the US markets and is limited to investigations of competition between CRAs. The impact of recently implemented regulations for CRAs in Europe has received very little academic attention and presents a highly topical research avenue. This Thesis makes several novel contributions to the literature, including (i) critical perspectives on the new regulation, especially in the EU; (ii) the impact of the solicitation status of sovereign ratings upon bank ratings; and (iii) whether European Securities Markets Authority (ESMA) rating identifiers affect the quality of ratings. Several methodologies are applied to enhance the robustness of the findings, including ordered probit analyses, fixed effects models, covariate matching (CVM) and propensity score matching (PSM). An extensive sample of rating actions by the largest CRAs (Fitch, Moody’s and S&P) during 2006 to 2014 is utilised.\ud
The critical review of the EU’s CRA regulation sheds light on several shortcomings and raises a need for reassessment. Some assumptions presented by the European Commission (EC) lack underlying evidence and are subjective in nature. Disclosures by CRAs have been inconsistent, which may reflect ambiguity in the regulations. Compliance with new regulation has affected the CRAs’ operating costs, which confirms earlier fears expressed by CRAs. Additional evidence is presented relating to CRAs’ business models. The second empirical chapter identifies that changes to the solicitation status of sovereigns induced by new disclosure rules have an adverse effect on banks domiciled in these countries. This has policy implications for regulators and banks since the ceiling effect identified in the study can lead to higher costs and harm the intermediaries. In the final empirical chapter, ESMA’s requirement for rating identifiers is questioned since it does not have any discernible impact on the quality of ratings reported by CRAs. This finding is of interest to policymakers, market participants and academics since the quality of ratings is linked to banking regulation and affects financial stability