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Why performativity limits credit rating reform

Published online by Cambridge University Press:  09 November 2023

Bart Stellinga
Bart Stellinga*
Affiliation:
University of Amsterdam, Netherlands
*
Corresponding author: Bart Stellinga, Department of Political Science, University of Amsterdam, Nieuwe Achtergracht 166, 1018 WV, Amsterdam, The Netherlands. Email: b.j.p.stellinga@uva.nl.
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Abstract

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The 2008 crisis made clear that credit rating agencies (CRAs) can contribute to systemic financial risk. Surprisingly, post-crisis reforms have hardly addressed the underlying problems, including rating agencies’ methodologies, their ratings’ homogeneity, and widespread market reliance on these signals. Current scholarship on CRA regulation blames policymakers’ unwillingness to fix systemic problems. This article draws on insights from the social studies of finance literature to provide a different explanation: the key obstacle is policymakers’ inability to fix these problems. The regulatory problem stems from performativity: risk assessments (including ratings) shape the risks they purport to merely describe. Adding to this literature, the article spells out how performativity limits credit rating reforms by making sweeping changes potentially harmful. Standardizing methodologies or setting up a public CRA could reinforce ratings’ homogeneity. Replacing ratings in regulation with market-based indicators might create worse systemic problems. The article then empirically details how EU policymakers, confronted with these dilemmas, ultimately steered clear of bold reforms.

Keywords

Credit rating agenciesperformativityregulationfinancial crisissystemic riskprocyclicality

Information

Type
Article
Information
Finance and Society , Volume 5 , Issue 1 , 2019, pp. 20 - 41
Creative Commons
Creative Common License - CCCreative Common License - BYCreative Common License - NCCreative Common License - ND
This is an Open Access article, distributed under the terms of the Creative Commons Attribution-NonCommercial-No Derivatives licence (http://creativecommons.org/licenses/by-nc-nd/4.0/), which permits noncommercial re-use, distribution, and reproduction in any medium, provided the original work is unaltered and is properly cited. The written permission of Cambridge University Press must be obtained for commercial re-use or in order to create a derivative work.
Copyright
© 2019 The Author(s)

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