Regulatory Capture

As new regulatory guidelines are implemented to thwart the next episode of financial instability, the phenomenon known as regulatory capture has reemerged as a topic of discussion. Whereas regulation has often been justified to correct some form of market failure, regulatory capture is typically cast as a form of regulatory failure that permits the firms in a particular industry to exert control over the government agency or the office charged with overseeing it. This chapter analyzes regulatory capture in relation to the credit rating industry. There are a number of questions to ponder. How has the rating industry come to require regulation? How has the thinking about regulatory capture been advanced recently? Is there evidence that firms within the rating industry have tried to influence recent regulatory changes? In light of the discussion regarding the differences in the vision of investment, are recent regulatory efforts overlooking anything with respect to venues for capture? If a PCRA is to liaise with this industry, we need to explore the thinking about the potential ways in which it could be captured. The answers to these questions will help strategize how such an agency could be protected from capture.