The development and the role of the credit ratings in European Union prudential bank regulation before and after the financial crisis

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http://urn.fi/URN:NBN:fi:hulib-201705304278
Title: The development and the role of the credit ratings in European Union prudential bank regulation before and after the financial crisis
Author: Parikka, Janne
Other contributor: Helsingin yliopisto, Oikeustieteellinen tiedekunta
University of Helsinki, Faculty of Law
Helsingfors universitet, Juridiska fakulteten
Publisher: Helsingfors universitet
Date: 2017
Language: eng
URI: http://urn.fi/URN:NBN:fi:hulib-201705304278
http://hdl.handle.net/10138/191319
Thesis level: master's thesis
Discipline: Eurooppaoikeus
European law
Europarätt
Abstract: This master’s thesis discusses the development and the role of credit ratings in European Union prudential bank regulation within the context of political economy and tries to offer a regulatory theoretic and interdisciplinary perspective on the regulatory use of the credit ratings in prudential bank regulation. In addition to the legal viewpoint, this thesis analyses the legal norms within the context of comparative political economy. Credit ratings are assessments of a credit risk which are issued by the credit rating agencies, which are private companies. From the economic perspective, the function of the credit ratings is to decrease the information asymmetry on the financial markets. These ratings were, and are still, used in plethora of regulation. In this thesis the scope is the use of credit ratings as a regulatory tool in European Union prudential bank regulation. The goal of the thesis is to build a coherent and contextualized framework of the regulatory use of the credit ratings as a method of risk assessment in prudential bank regulation through analysing bank capital requirements regulation within the context of political economy development. The focus point is the global financial crisis of 2008 and its implications and consequences to the regulation. The subprime mortgage market crisis in U.S. led to an international banking crisis which revealed massive systemic risks within global financial markets which are partly attributable to use of rating-based regulation. Role of the credit rating based regulation is analysed through normative assessment of the capital requirements legislation before and after the crisis. This includes review of Basel Accords and its implementation to European Union legislation through Capital Requirement Directive(s) and Regulation with a partially comparative review of the U.S. regulation. The role of the regulation as a partial cause of the financial crisis is reviewed through its the economic effects. These include pro-cyclicality and systemic risk caused by the over-reliance to the credit ratings by regulators and the market participants. Possible alternatives for rating-based regulation are also reviewed. From theoretical perspective, this thesis analyses the development of the credit rating based regulation from 1970s onwards by reflecting the legislative choices to the changes in the global political economy after the fall of Bretton Woods system. This thesis argues that public regulators have, over time and gradually, delegated (quasi-)regulatory power to credit rating agencies as the Western world has shifted towards disembedded liberalism. The reasons for this delegation are explained through varieties of capitalism approach, whereas the delegation itself and its nature are assessed through principal–agent and resource dependency theories. These findings are then used to assess the nature and the role of the credit ratings in capital requirements as a part of prudential regulation.


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