An Economic Analysis of the Liability of Credit Rating Agencies: A Positive Inquiry from a Kaldor-Hicks Efficiency Perspective

Julius S X Yee

Abstract


The liability of credit rating agencies has been subject to critical debate since the global financial crisis of 2008. It has been well documented, and argued, by various scholars and authors that the rules governing such impositions have been traditionally framed by reactionary, post-crisis driven reforms which do not necessarily reflect, or capture, in economic terms, the consequentialist aspects of whether they are beneficial to the welfare of wider market participants. This paper attempts to highlight, through economic analysis, some of these wider market repercussions, and will aim to do so by providing an analysis of liability rules from a Kaldor-Hicks efficiency perspective, largely from a qualitative viewpoint. It is hoped that this analysis will add further insight with regards to the question of liability and regulation, chiefly in the hopes of aiding our ability in determining whether current regulatory reforms on credit rating agencies, principally within the European Union, are sufficiently robust in addressing the problem of poor regulatory incentives.


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