Credit Rating Agencies and Regulatory Reform

This paper, a chapter in the forthcoming Research Handbook on the Economics of Corporate law, describes the leading research related to credit ratings, and assesses regulatory proposals related to ratings, including those in the Dodd-Frank Act of 2010. It explains how rating agencies have paradoxically become more profitable as the quality of their ratings has declined, including during the recent financial crisis.We focus on two major areas of reform: oversight and accountability. The Dodd-Frank Act potentially advanced the oversight goal by authorizing a new regulatory body to regulate rating agency practices. It also included accountability reforms, including new liability provisions. We describe the advantages and disadvantages of these reforms. We also assess what is perhaps the most important ratings provision in the Dodd-Frank Act: the requirement that regulators remove references to ratings in regulation.Ratings regulation will remain an important area for scholarly debate as many aspects of the legislative reform require additional study or regulatory implementation. This chapter is intended to be a resource for scholars, regulators, and practitioners as these issues arise