Credit Ratings and Market Over-reliance

An International Legal Analysis


Taking position from the recent 2007-2009 financial crisis, Credit Ratings and Market Over-reliance: An International Legal Analysis by Francesco De Pascalis provides an in depth legal and regulatory analysis of the concept of over-reliance in the use of ratings and how regulation facilitates over-reliance is different from mere reliance on credit ratings. Not only does the book provide an incisive doctrinal analysis of the concept of over-reliance, it also considers over-reliance from a comparative and international perspective by reviewing legal and regulatory developments under European Union and US law and how over-reliance has been addressed in international financial regulation.

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Francesco De Pascalis, Ph.D. (2015) is lecturer in financial law at Brunel University London and associate research fellow at IALS University of London. He published several articles on the regulation of credit rating agencies in established journals, including Oxford Journals.
List of Abbreviations

1 Reliance versus Over-reliance
 1.1 Contextual Setting
 1.2 A Holistic Study of Over-reliance
 1.3 Book Structure

2 The ‘Good’ Aspects of Credit Ratings: A Basis for Reliance
 2.1 The Importance of Credit Ratings in the Financial Markets: The Reliance of the Private Sector
  2.1.1 The Credit Rating Industry: Origins and Development
  2.1.2 Credit Ratings: Categories and Formation Process
  2.1.3 Credit Ratings as Opinions on Creditworthiness
  2.1.4  cra Informational Services
  2.1.5 The cra Monitoring Services: Outlook and Watch-List Procedures
  2.1.6 Users of cra Services
 2.2 The Public Sector’s Reliance on Credit Ratings
  2.2.1  cras as Certification Providers
  2.2.2 Clarifying the Certification Function of cras
  2.2.3 Understanding the Regulatory Reliance on Credit Ratings
  2.2.4 Mapping the Regulatory Use of Credit Ratings
  Concluding Remarks

3 Reliance Versus Influence: A Roadmap toward the Risk of Over-Reliance
 3.1 Negative Effects of Rating Changes and the Role of Rating-Based Regulation
  3.1.1 Downgrades, Rating Triggers and Liquidity Problems
  3.1.2 Cliff-Edge Effects and Herd Behaviours
  3.1.3 Systemic Risk and Spill-Over Effects Across Markets
  3.1.4 Rating-Based Regulation and Its Implications: A Critical Review
  Concluding Remarks

4 Over-Reliance on External Credit Ratings: In Search of a Meaning
 4.1 Understanding Over-Reliance on Credit Ratings
  4.1.1 Detecting the Phenomenon: Over-Reliance in the US Pre-crisis Regulatory Debate on CRAs
  4.1.2 Over-Reliance in the eu Pre-crisis Regulatory Debate on cras
  4.1.3 The Sources of Over-Reliance: Rating-Based Regulation versus the Structured Finance Sector
  4.1.4 Closing the Gap: Defining Over-Reliance on External Credit Ratings
  Concluding Remarks

5 Regulatory Approaches at the National, International and Regional Levels to Address Over-Reliance on Credit Ratings
 5.1 The Evolution of the Regulatory Debate
  5.1.1  US Level: Section 939A of the Dodd-Frank Act: Reliance versus Over-Reliance
  5.1.2 The fsb Principles for Reducing Reliance on Credit Ratings: Searching for Over-Reliance
  5.1.3 The European cra Regulation iii : Confirming Over-Reliance
  Concluding Remarks

6 Regulatory Approaches against Over-Reliance and Their Implementation
 6.1 In Search of Effectiveness
  6.1.1 Normative Approaches in Focus
  6.1.2 Implementation Process in Focus
 6.2 The Status of the us Reforms under Section 939A of the Dodd-Frank Act
  6.2.1 The Early Debate on Section 939A
  6.2.2  us Federal Agencies Reform Processes
  6.2.3 The us Reforms: A Critical Review in Relation to the Risk of Over-Reliance
 6.3  The Status of the eu Reforms under the cra iii Regulation
  6.3.1 The Work of the esas
  6.3.2 The eba’s, Mandate
  6.3.3 The esma’s Mandate
  6.3.4 Perspectives on the eu Approach in the Future
 6.4 The eu Approach: A Critical Review
 6.5 A More Independent Credit Risk Analysis: From Theory to Practice
  6.5.1 The Status of Implementation
  6.5.2 The Second Level of the Approach: A Critical Review
  Concluding Remarks

7 Reviewing the Debate on Over-Reliance and Approaches against it
 7.1 Credit Rating References and the ‘Official Seal of Approval’: What Has been Missed?
  7.1.1  cra Market Failures and Regulatory Interventions
  7.1.2 Evidence of Over-Reliance in the Structured Finance Sector
  7.1.3 Evidence of Over-Reliance on Credit Rating Legislative References
 7.2 Anticipating the Post-Crisis Debate on Over-Reliance
  7.2.1  cra Message to the Regulators
  7.2.2  cra Message to the Users of Credit Ratings
  Concluding Remarks

8 Conclusions
 8.1 Taking Stock of the Situation
  8.2 Developing an Assertion into Certainty: Providing Evidence of Over-reliance
  8.3 Encouraging More Dialogue and Coordination at All Levels
  8.4 Ensuring More of a Level-Playing Field among Credit Risk Assessment Tools
  8.5 Looking Ahead
  Concluding Remarks

The book will be of interest to academics studying financial regulation from a legal and economic perspective. Equally, to doctoral, LLM students in financial law; and law/economic university libraries.
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