A comparative study of Credit Rating Agency between the United States, European Union and China

The credit rating agencies (hereafter CRAs) plays a significant role in the financial market but they were criticized for failing to accurately reflect the default risks of bonds, especially in structured finance, which exacerbated the global financial crisis of 2007–¬8, or even resulted in the financial disruptions throughout the entire financial market in two respects: the over-reliance on credit ratings and the low rating quality. Against this background, this thesis is designed to identify the issues that cause such big rating failures and analyse the effectiveness of the existing regulations against such issues. More importantly, having illustrated the issues and regulations, this thesis puts forward some suggestions to the current regulatory frameworks. This thesis analyses the issues form both external and internal perspectives. From an external perspective, the market and regulatory over-reliance on the credit ratings strengthen the interconnections among the financial institutions and intermediaries in the financial market, which exacerbates the liquidity risk and systemic risk stemming from the rating downgrades, especially during the financial crisis. From an internal perspective, three issues that affect the accuracy of credit ratings and the independency of CRAs include the conflict of interest, the oligopolies market structure and the civil liability for CRAs. Firstly, the conflict of interest provides incentives for CRAs to provide inflated rating services. Secondly, when the oligopolistic members are aware of their dominant market status, they lack motivations to update rating models and methodologies. Thirdly, it analyses whether or not civil liability is an effective approach to deter CRAs from their low rating quality. This thesis adopts a comparative approach between the European Union, United States and China. In order to provide a better understanding for the different problems with respect to the issues mentioned above and the different jurisdictions in these three regions, it first introduces the respective evolution of CRAs in these three areas respectively. It then examines the effectiveness of their various regulatory approaches to each issue as mentioned above