Private Ratings, Public Regulations: Credit Rating Agencies and Global Financial Governance by Andreas Kruck
L. Camille van der Marel
Kruck, Andreas. Private Ratings, Public Regulations: Credit Rating Agencies and Global Financial Governance. Transformations of the State Ser. New York: Palgrave MacMillan. 2011. 224 pp. Print.
On 5 November 2008, the Queen of England made her first visit to the London School of Economics. Her visit’s premise, as outlined in the “Focus,” LSE’s Spring 2009 newsletter, was to open the university’s tersely named New Academic Building. What “Focus” does not mention, however, is the shrewd question Her Majesty posed to academic staff she consulted as she toured the new facility: “Why did nobody notice it?” The ‘it’ she refers to is the global financial crisis; her question underscores the failure of the most educated and ostensibly well positioned individuals to foresee the near total collapse of world markets.
From Buckingham Palace to the coffee shop, and everywhere in-between, individuals are increasingly aware of and intellectually invested in the workings of global financial markets. Perhaps this is a result of the ‘expertocratic’ nature of the current global financial crisis: working knowledge of the mechanisms of global markets has gone from being the exclusive concern of highly specialized insiders to a more general intellectual pursuit. It is this growing interest that Andreas Kruck, a Teaching and Research Associate at the Geschwister-Scholl Institute for Political Science at the Ludwig Maximilian University of Munich, seeks to address in his dissertation-based monograph, Private Ratings, Public Regulations: Credit Rating Agencies and Global Financial Governance.
Kruck’s research, published as part of Palgrave Macmillan’s Transformations of the State series, begins with an important observation: public regulators such as state and regional governments increasingly depend on private non-state actors such as credit rating agencies when developing regulations, a change that reinforces “state-sanctioned and state-bolstered private governance” (xv). From this initial observation, Kruck uses his first chapter, “Introduction: Private Ratings and Public Purposes,” to ease readers into increasingly transnational and decreasingly transparent world market systems. Regulatory authority, Kruck contends, no longer falls under the exclusive purview of public powers but is decentralized between public and private actors. He does not, however, suggest that nation-states have become obsolete, since most non-state actors gain and maintain legitimacy through states’ use of their analytical resources. This first chapter maps out key concepts such as the historical emergence of credit rating agencies and the underpinnings of the Basel I and Basel II accords (the Basel committee’s recommendations concerning banks’ allowable levels of operational, market and capital risks, and minimal capital requirements), and then briefly explains the monograph’s larger aim: to provide a “theory-based answer” (9) for why public financial regulators rely on private credit rating agencies to measure financial market risk.
In the second chapter, “The Regulatory Use of Credit Ratings: Overview and Conceptualization,” readers are briefly introduced to the world’s three largest credit ratings agencies – Standard & Poor’s, Moody’s Investors Service and Fitch Ratings – whose (almost Dickensian) names increasingly surface in articles and exposés about the global financial meltdown, yet whose institutional mechanics are not generally understood. For example, the industry defines their ratings as ‘opinions,’ which are legally protected as free speech, mitigating agencies’ liability. Readers learn how credit ratings are produced, used and have become practically compulsory for national economies – developed and developing – that wish to gain access to investment capital. Of particular value to readers new to discussions of global financial markets is Kruck’s explanation of how poor ratings result in increases to a state’s interest rates on government debt and their investors’ rate of return. This chapter also maps out how credit ratings become embedded in national and international regulatory systems: governments and international bodies increasingly base regulatory policy on ratings from private agencies – as when government regulations require pension funds to invest in asset backed securities rated at A or higher – which makes these ratings integral to the operation of various elements of the state. Kruck charts the use of credit ratings in the U.S. regulatory system in some depth and presents further examples of the regulatory use of credit ratings in other selected countries. He includes nations such as Canada, Australia, Hong Kong, Argentina and most of Western Europe but excludes Third World economies, which remain largely overlooked in this text and in discussions of the global financial crisis more generally.
Readers who are not specifically invested in organizational studies theories – principal-agent theory, resource dependence theory, the varieties-of-capitalism approach – may become frustrated with Kruck’s study in its third (“The Theoretical Model: An Embedded Resource Dependence View on Delegation”) and fourth (“Explaining Trend and Variation in the Regulatory Use of Credit Ratings”) chapters. It is not that these discussions are impenetrable; Kruck’s writing is accessible even to an audience, such as myself, who has not studied economics or political science. His repetition and frequent flagging of key words even feels textbook-ish at times. But for readers concerned with cultural studies or activist scholarship, Kruck’s synthetic approach necessarily reinforces existing theoretical models, without significantly challenging them or questioning their ontological underpinnings: he appears to bend his research subject to fit existing theories rather than bending theories to account for his observations. An example: after distinguishing between resource dependence theory and resource exchange theory, Kruck concludes that the interaction between credit rating agencies and public regulatory bodies must be classified as one of resource dependence, as the power in such an interaction “stems solely from public regulators” (97). This observation contradicts earlier discussions that describe credit rating agencies as monopolistic gatekeepers of international finance (34), as well as his conclusion that “credit ratings agencies are private authorities – not only by the grace of the state but also in their own right” (157). Perhaps neither resource dependence nor resource exchange theory completely account for how public and private interactions cultivate influence and power in non-state actors over time, and the reader is left wondering why Kruck forces his observations into ill-fitting but pre-existing definitions. Early in his text, Kruck refers to his approach as “theory-re-engineering” (15), yet while this synthetic theoretical model may be valuably innovative to a reader well versed in international economics or organizational studies, it appears pedantic to readers outside these fields.
Despite these issues, Kruck’s empirical model convincingly explains why transfers of regulatory power from public institutions to private ratings agencies occur. Particularly useful is his elaboration on the rise of the Bretton Woods system (associated with embedded liberalism, wherein market forces are constrained within a matrix of regulatory constraints) after WWII, followed by a shift towards a system of disembedded liberalism (marked by the removal of social and political regulatory constraints from market processes and corporate activities) with the move from fixed to floating exchange rates in the 1970s. This shift, Kruck shows, correlates with the rise of governments’ reliance on private ratings in regulatory practice. Indirect governance through financial credit rating agencies appeals to governments, he explains, whose own interventions are increasingly limited in neoliberal, transnational markets.
Kruck tests his proposed theoretical model by highlighting Hall and Soskice’s “varieties of capitalism approach” in his fifth chapter, “Making Sense of the Role of External Ratings in Basel II,” in which he compares American and German negotiators’ responses to the implementation of the Basel II accord in multilateral negotiations that continued up until 2010. These two nations roughly embody Anglo-Saxon/liberal market economies and Rhenish/coordinated market economies, a difference that, according to Kruck, accounts for the nations’ differing perceptions of the essentiality and substitutability of non-state actors’ informational resources and, accordingly, each nations’ varying reliance on private credit rating agencies – the U.S. being more dependent, Germany being less. Kruck’s sixth and final chapter, “Conclusion and Outlook: After the Crisis,” tentatively projects, based on his proposed theoretical model, what the future may hold for credit rating agencies given their spectacular failure to protect investors from the U.S. mortgage crisis and subsequent crash of world markets.
On 22 July 2009, representatives of the British Academy wrote a letter to the Queen in response to her crucial question. They stated “that the failure to foresee the timing, extent and severity of the crisis […] was principally a failure of the collective imagination of many bright people, both in this country and internationally, to understand the risks to the system as a whole” (Besley and Hennessy 3). The recent global financial crisis highlights the fact that world economic systems are not necessarily understood or safeguarded by those closest to them; a critical and imaginative consideration of these systems must be offered by those who study outside departments of political science and economics, which makes Private Ratings worth examining by humanities scholars. Its readers will experience the expected benefits and difficulties that accompany the study of research produced outside of one’s primary field, but the text’s primary benefit is that it is accessibly written and offers a straightforward introduction to the specialized topic of credit rating agencies and the collaboration of public and private actors in governance more generally. Further, Kruck provides the valuable reminder that there is no singular Capitalism existing in the world today but, rather, many nuanced expressions of this economic and political system that act and react differently to market forces. He also exposes readers to a healthy crop of new terms – disintermediation, transsovereignty, homo oeconomicus – that excite creative possibilities about the study of economic systems at the very level of language.
Despite these qualities, though, Kruck’s analysis so closely focuses on empirical theories that his ethical and philosophical commitments remain veiled, an issue that could have been lessened by expanding on his brief references to economic philosopher Karl Polanyi. Ultimately, Private Ratings’ readers are left with little sense as to whether Kruck perceives the transfer of regulatory power to non-state actors as a perverting anomaly in otherwise healthy capitalist systems or as a natural, if disconcerting, transfer of governing power from the public to the private that is to be expected in late capitalism. The book concludes without hinting at what Kruck would change, if anything, about private actors’ influence on public regulations.
Besley, Tim and Peter Hennessy. “Letter to Her Majesty the Queen.” Financial Times Online. 22 July 2009. Web. 12 November 2011.
London School of Economics. Focus LSE Newsletter. London: LSE, Spring 2009. Print.
L. Camille van der Marel is undertaking her doctoral studies in the department of English and Film Studies at the University of Alberta. Her research examines the transition from postcolonial to transnational approaches in the theory and criticism applied to Canadian and world literatures. She focuses on issues and representations of debt, indebtedness and the nation within these literatures.