Ratings Performance, Regulation and the Great Depression: Lessons from Foreign Government Securities

Marc Flandreau, Norbert Gaillard and Frank Packer

No 7328, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: During the 1930s, rating agencies took up a central role in regulatory supervision that they still have today. We study the process through which they received this regulatory license. The proximate cause for this changeover was the economic shock of the Great Depression. Exploring the performance of rating agencies in assessing the risks of sovereign debt, an important segment of the bond market, we show that superior forecasting capacities cannot explain the agencies’ growing importance. We argue that the agencies’ perceived lack of conflicts of interest (in contrast to other financial intermediaries) was a major factor in bringing them to the forefront of a new regulatory regime.

Keywords: great depression; Rating agencies regulatory licence; sovereign debt (search for similar items in EconPapers)
JEL-codes: F34 G28 N2 N40 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-his and nep-reg
Date: 2009-06

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