Credit Rating Agencies: A Regulatory Challenge for Australia
![handle is hein.journals/mulr33 and id is 41 raw text is: CREDIT RATING AGENCIES: A REGULATORY
CHALLENGE FOR AUSTRALIA
TiN A BUNJEVAC*
[This article identifies a number of structural and operational deficiencies inherent in credit rating
agencies' ('CRAs') current business model and rating methodologies. It is argued that CRAs'
reputational capital alone is not sufficient to protect the integrity of the CRA market or to ensure
efficient and transparent functioning of their businesses. Prescriptive operational rules are justified
and necessary in order to address the conflicts of interest which are inherent in the issuer-pays
business model, particularly in structured finance operations. An efficient inspection, surveillance
and supervision regime is also essential to maintaining the credibility of the issuer-pays business
model and CRAs' reputation. Australian law-makers and the Australian Securities and Investments
Commission should consider some of the specific operational measures proposed by the United States
and European Union regulators and remove CRAs' current exemption from the requirement to hold
an Australian Financial Services Licence. This article also proposes the creation of an external
oversight board inspired by the US Sarbanes-Oxley Act, which would serve as a means of promoting
enhanced transparency of governance and restoring CRAs' reputational capital.]
CONTENTS
I Introduction ............................................................................................................... 40
II Ratings, Reliance and Reliability ....................................................................... 42
A A Flawed Rating Methodology ............................................................... 42
B Reliance without Reliability .................................................................... 44
C Regulatory Licences ............................................................................... 45
D The Failure of Reputational Capital ........................................................ 50
III R ating the R aters ................................................................................................. 51
A R ating Shopping ...................................................................................... 51
B SEC Exam ination ................................................................................... 53
C Inherent Conflicts of Interest ................................................................... 54
IV The Regulators' Perspective ................................................................................. 57
A The Operational M odel ............................................................................ 57
B The Regulators' D ilem m a ........................................................................ 58
C The SEC and European Commission Rules ............................................. 60
D External Enforcement and Supervision .................................................... 63
E Options for Australian Regulators ........................................................... 65
V C onclusion ................................................................................................................ 67
BA, LLB (Melb); Member of the Victorian Bar; Lecturer of Comparative Corporate Law,
Victoria Law School, Victoria University. Email <tin.bunjevac@gmail.com>.](ViewImageLocal?handle=hein.journals/mulr33&div=5&collection=&method=preview&ext=.png&size=3)
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Credit Rating Agencies: A Regulatory Challenge for Australia
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