Co-Regulating Transnational Risks: The State and International Credit Rating Agencies

This paper considers how non-state actors may be engaged in risk regulation under the auspices of the state. Some of the most significant risks in modern society are transnational in character and in this context the state and traditional legal mechanisms of regulation may not always form an adequate response. The regulatory literature suggests a mix of actors and tools may be best for addressing transnational risks. In this paper a case study is presented of a non-state actor that has come to play an important role in the regulation of risks that are involved when investing in bonds, this is a case study of the international credit rating industry. As commercial firms international rating agencies came to be important standard setters addressing the uncertainty that is involved when investing in the debt capital markets. The capacity of rating agencies to gather and provide vast amounts of information about a wide range of market participants, has led many actors including the state, to turn to the ratings that the agencies develop and to use these as indicators of risk. The incorporation of credit ratings into laws and regulations promulgated by states and international bodies, has further enabled the regulatory role of rating agencies. This paper will look more closely at the co-regulatory regime shared by the state and the international credit rating agencies as it has developed in the debt capital markets. The paper will furthermore address how the use of and reliance on credit ratings by the state has come under increasing pressure in recent years especially as a consequence of the global financial crisis of 2007-08. This crisis brought to the fore doubts around the ability of rating agencies to successfully transform uncertainties into risk and shortcomings in the accountability of the rating agencies for their actions and the (unintended) consequences of their actions.