Study On The Regulation Mode Of Credit Rating Agencies

With the burst of2007Financial Crisis, the reputation of three internationalcredit rating giants (Moody’s, Standard&Poor’s and Fitch) is greatly damaged, whileit gives a chance of development to the Credit Rating Agencies in China, which werein the shadow of those international credit rating giants in the past. However, inpresent financial market of our country which stick to strict loan guarantee system,Credit Rating Agencies are not paid much attention to by the market and financialregulators, thus the credit rating agency supervision mode of China exists many flaws.Conversely, the Credit Rating Agency supervision modes in the west are more maturethan that in our country, for they largely benefit from the free financial market and theprecious lesson they learned from the Financial Crisis. Security market should be freeand non-closed. With the improvement of openness degree, Credit Rating Agencieswill play a much more important role in China. This paper mainly analyzes creditrating agency supervision mode in Europe and the United States, in aim of providingreference information for legislators, improving the construction of supervisionlegislations of credit rating agencies, bringing the important information value ofCredit Rating Agencies into full play and promoting the stability of financialderivatives market.The paper is divided into three parts，besides introduction and conclusion.The first part of this paper describes the role credit rating agencies play in thefinancial markets and a variety of market failures of rating agencies which expose inthe financial crisis, and its causes. Credit Rating Agencies play an important role inthe financial markets: it can reduce the information asymmetry of the financialmarkets, help issuers reduce issuance costs, assist investors in investmentdecision-making, and help regulators for financial regulation. However, due to theimperfections of the regulatory system, there are many problems in rating industry,which is mainly reflected in the conflict of interest between rating agencies, ratingpractitioners with their “interested person”, the out-dated rating model and ratingmethods of structured finance products, the opaque rating business behavior and thelag internal control system. The reason mainly lies in failure of reputation capitalmechanism and the over-reliance by the investors in investing practice and regulatorsin supervision regime. The second part of the article discusses supervision mode of rating agencies andthe selection principle. There are two types of Credit Rating Agency supervisionmodes: market supervision mode and government regulatory mode. At the beginning,the European and American regulatory authorities adopted market supervisionapproach, relying on reputational capital mechanism, Code of Conduct Fundamentalsfor Credit Rating Agencies or self-regulatory organization of credit rating industry tomonitor the behavior of Credit Rating Agencies. After the burst of Enron scandal andsubprime mortgage crisis, regulators began to turn to the government regulatoryapproach, relying on registration procedures and information disclosure procedures toperform strict regulation on the behavior of Credit Rating Agencies. The supervisionmode should be designed to help investors improve their analytical skills, and shouldbe in line with the characteristics of the rating industry and economic principals.The third part of the article discusses the construction path of regulatory modeand system of Credit Rating Agency in our country. From a macro perspective, ourregulatory approach of the rating agencies should be a combination of governmentregulatory mode and market supervision mode, giving full play to the advantages ofself-regulatory organization at the same time to ensure the effectiveness of regulation.From a Micro perspective, the supervision regime in our country should utilize theregistration-process-centered regulatory mode and information-disclosure-centeredregulatory mode, perfecting registration procedures and information disclosureprocedures, as well as ensuring full play to the reputation capital mechanisms.