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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/26109
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| Title: | "Good Intentions Gone Awry: A Policy Analysis of the SEC's
Regulation of the Bond Rating Industry," |
| Authors: | White, Lawrence J. |
| Keywords: | Securities and Exchange Commission
entry regulation
bond rating industry
nationally recognized statistical rating organizations |
| Issue Date: | 2005 |
| Series/Report no.: | EC-05-16 |
| Abstract: | This paper discusses the SEC's regulation of the bond rating industry.
Until a few years ago this specific branch of SEC regulation was largely
unknown outside the agency and the bond rating industry itself, even
among knowledgeable Washington insiders. But the SEC has actually
regulated the industry since 1975: by limiting entry, in an indirect but
powerful way. As a consequence, incumbent bond rating firms are
protected; potential entrants are impeded; and new ideas and
technologies for assessing the riskiness of debt, and thereby the
allocation of capital, may well be stifled. This entry regulation is an
excellent example of good intentions having gone awry, via the
"law" of unintended consequences. The good intentions were to
improve the safety-and-soundness regulation of financial institutions,
and even to use "market" information to do so. But the
unfortunate result has been a distortionary entry restriction regime
with respect to bond rating firms. Fortunately, there are better ways to
achieve the desired goals ways that would permit the SEC to cease these
entry restrictions and nevertheless allow safety-and-soundness
regulation of financial institutions to proceed in desirable directions.
If the SEC were to exit from its role as the entry regulator of the bond
rating industry, financial markets’ participants could then make
their own decisions as to which firms and methods offer the best
information as to the default probabilities and other relevant
parameters with respect to debt issuances. This paper expands on these themes. |
| URI: | http://hdl.handle.net/2451/26109 |
| Appears in Collections: | Economics Working Papers
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