REFORMING THE REGULATORY REGIME FOR CREDIT RATING AGENCIES IN KOREA: ANALYSIS AND PROPOSAL BASED ON RECENT U.S. EXPERIENCE

Credit Rating Agencies, which from this point on will be referred to as CRAs, have become hugely important and an integral part of the capital market and regulatory institutions worldwide. This naturally leads to CRAs big influence on financial market and obligations of CRAs to public. Since the financial crisis, they have come under increased scrutiny. They have been criticized for poor performance in their core function - conveying accurate, impartial information about credit quality to potential investors. CRAs have had additional problems such as conflict of interest associated with the issuer-pays, competition, liability, and different fee structure to align incentives. CRAs are not going to be dislodged from this dominant position, despite introduction of Dodd-Frank Act and efforts by G20 to clean house, more specific reforms are badly warranted. The dominance of few CRAs in the market place also poses a serious problem as well. Currently, The U.S. CRAs such as Moody's, S&P, and Fitch hold sway over the global CRAs industry, crowding out firms from smaller countries and catering to U.S. market needs. Korea has not only all the general problems of the U.S., but also the Korean market specific problems where foreign-owned CRAs dominance holds sway. Despite the significant differences in scale of economies and policies between the two countries, Korea has accepted the U.S. CRAs legislation without careful consideration and carried out several revisions. These problems symptomatic of a market dominated by CRAs include: (1) being dominated by U.S. CRAs, (2) inaccurate of credit ratings performed by U.S. and Korean CRAs, (3) redundant reforms effectiveness, (4) insufficient efforts to invigorate independent Korean CRAs, (5) inherent problems like Chaebol, and (6) small-scale CRA markets This study proposes feasible solutions for improving self-development of Korean CRAs by examining four key areas: (1) the current status of U.S. and Korean CRAs, (2) past performances of both countries' CRAs, (3) the current regulatory regimes and the recent reforms and (4) reasons why both reforms reach the limit. By discussing all considerations above, this study proposes feasible suggestions for improving self-development of the Korean CRAs.