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Ratings Performance, Regulation and the Great Depression: Lessons from Foreign Government Securities

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  • Flandreau, Marc
  • Packer, Frank
  • Gaillard, Norbert

Abstract

During the 1930s, rating agencies took up a central role in regulatory supervision that they still have today. We study the process through which they received this regulatory license. The proximate cause for this changeover was the economic shock of the Great Depression. Exploring the performance of rating agencies in assessing the risks of sovereign debt, an important segment of the bond market, we show that superior forecasting capacities cannot explain the agencies? growing importance. We argue that the agencies? perceived lack of conflicts of interest (in contrast to other financial intermediaries) was a major factor in bringing them to the forefront of a new regulatory regime.

Suggested Citation

  • Flandreau, Marc & Packer, Frank & Gaillard, Norbert, 2009. "Ratings Performance, Regulation and the Great Depression: Lessons from Foreign Government Securities," CEPR Discussion Papers 7328, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:7328
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    References listed on IDEAS

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    Cited by:

    1. Marc Flandreau & Juan H. Flores & Norbert Gaillard & Sebastián Nieto-Parra, 2010. "The End of Gatekeeping: Underwriters and the Quality of Sovereign Bond Markets, 1815–2007," NBER Chapters, in: NBER International Seminar on Macroeconomics 2009, pages 53-92, National Bureau of Economic Research, Inc.
    2. Ludovic Moreau, 2009. "Regulatory versus Informational Value of Bond Ratings: Hints from History ..," Working Papers hal-04140847, HAL.
    3. Lawrence J. White, 2013. "Credit Rating Agencies: An Overview," Annual Review of Financial Economics, Annual Reviews, vol. 5(1), pages 93-122, November.
    4. Agliardi, Elettra & Agliardi, Rossella & Pinar, Mehmet & Stengos, Thanasis & Topaloglou, Nikolas, 2012. "A new country risk index for emerging markets: A stochastic dominance approach," Journal of Empirical Finance, Elsevier, vol. 19(5), pages 741-761.
    5. Oosterlinck, Kim & Accominotti, Olivier & BRIERE, Marie & Burietz, Aurore & Szafarz, Ariane, 2020. "Did Globalization Kill Contagion?," CEPR Discussion Papers 14395, C.E.P.R. Discussion Papers.
    6. Marc Flandreau & Norbert Gaillard & Ugo Panizza, 2009. "Conflicts of Interest, Reputation and the Interwar Debt Crisis: Banksters or Bad Luck?," IHEID Working Papers 02-2010, Economics Section, The Graduate Institute of International Studies, revised Feb 2010.
    7. Lawrence J. White, 2010. "Markets: The Credit Rating Agencies," Journal of Economic Perspectives, American Economic Association, vol. 24(2), pages 211-226, Spring.

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    More about this item

    Keywords

    Great depression; Rating agencies regulatory licence; Sovereign debt;
    All these keywords.

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • N2 - Economic History - - Financial Markets and Institutions
    • N40 - Economic History - - Government, War, Law, International Relations, and Regulation - - - General, International, or Comparative

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