Foundations and Perspectives of the Rating Agencies’ Regulatory Framework in the European Union

Trust, a defining principle of capitalist economies, lies at the very foundation of trade, as stated by Kenneth Arrow. The importance of rating activities needs to be interpreted within this framework: rating is an internationally recognized “seal of quality” offering investors a frame of reference and analysis without which “access to international sources of funding is severely restricted or much more expensive. Moreover, the increasingly finance-dependent global economy unfolding over the past thirty years has helped turn rating agencies into key players. Although the activity started off in the USA, the European Union is no stranger to the phenomenon: European legislation still regards agencies’ appreciations as references and the Commission has recognized the “almost institutional” character of their role. It is worth pointing out that rating is all the more essential since the system is “opaque”: due to the growing disintermediation and the development of complex products, the demand for rating has soared. This is dealt with in the succeeding paragraphs. As well as being “dispensers of trust”, agencies are also — and consubstantially — objects of trust: their reputation for professionalism built up over the years was enough to convince European political leaders that any attempt to regulate the sector would be unnecessary — even damaging. This position was strengthened by a profound belief in the virtues of self regulation. Thus, as it completed the unification and de-compartmentalization of its domestic market, the European Union essentially relied on the regulatory power offered by agencies. The successive financial crises have cast a shadow over this position. This contribution aims to highlight these recent evolutions (II) in light of the American model which, as we will see, served as a genuine “basis for reflection” for the European Union (I). A conclusion will try to visualize future scenarios for rating agencies and regulatory systems.