King, Michael and Sinclair, Timothy J. (2001) Grasping at straws: a ratings downgrade for the emerging international financial architecture. Working Paper. University of Warwick. Centre for the Study of Globalisation and Regionalisation, Coventry.

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Abstract

Following the Asia crisis of 1997-98, policymakers invested a great deal of energy in designing a new international financial architecture. However many of the policy proposals which have emerged from think tanks and the multilateral agencies have proven unworkable or politically unpalatable. The debate focuses on state-led initiatives. But the assumption that public policy is by definition an output of public institutions is difficult to sustain in an era of global change. This paper considers specialized forms of intelligence-gathering and judgment-determination which seem increasingly important as sources of governance in this era of financial market volatility. These agents - embedded knowledge networks (EKNs) - include the major bond rating agencies, Moody’s Investors Service and Standard and Poor’s, the focus of this paper. The Basel Committee has put forward a serious proposal to reform the existing capital adequacy framework which uses banks' own internal ratings and external bond ratings to calculate bank risk-weighted capital requirements. The paper shows that there are potentially unexpected consequences from using private rating agencies as a substitute for state-based regulation, due to the organizational incentives that shape the ratings industry. Cementing these organizational incentives into the emerging financial architecture will give rise to negative social and economic consequences.

Item Type:	Working or Discussion Paper (Working Paper)
Subjects:	H Social Sciences > HG Finance
Divisions:	Faculty of Social Sciences > Centre for the Study of Globalisation and Regionalisation
Library of Congress Subject Headings (LCSH):	Bank for International Settlements, Financial crises -- Asia, International finance, Bonds -- Ratings and rankings, Knowledge management, Banks and banking -- Asia, Capital market -- Asia
Series Name:	Working papers (University of Warwick. Centre for the Study of Globalisation and Regionalisation)
Publisher:	University of Warwick. Centre for the Study of Globalisation and Regionalisation
Place of Publication:	Coventry
Date:	November 2001
Number:	No.82/
Number of Pages:	23
Status:	Not Peer Reviewed
Access rights to Published version:	Open Access
Description:	Paper presented to the Annual Meeting of the American Political Science Association, San Francisco, August 30-September 2, 2001
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URI:	http://wrap.warwick.ac.uk/id/eprint/2036

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