The functions and consequences of private rating agencies in the context of the regulation of global financial markets

The increasing importance of rating agencies as organizations specialized on credit evaluation demonstrates that a global financial economy also produces globally oriented organizations which reflexively contribute to the concentration of financial decisions. Furthermore, the use of such ratings in contexts of legal control seems to emphasize the significance of mixed public-private forms of regulation which make use of market actors' expertise and intimate knowledge of problems. Shedding light on both aspects, the article examines the role of rating agencies in the regulation of global financial markets. Using concepts developed in risk sociology and sociology of knowledge it shows that, on the one hand, rating agencies indeed contribute to the handling of economic risks by constructing virtual worlds which stabilize expectations, while, on the other hand, in fulfilling their manifest function, they also produce new contingencies and uncertainties. Rating agencies improve the capacity for managing complexity of the self-referentially operating financial markets; but that is the very reason why they follow the logic of a functionally differentiated society tending towards an increase in options and contribute to the further growth of ignorance and the riskiness of financial markets. As to "regulation by rating" it is obvious that while the use of ratings expands the internal complexity of the regulatory regime, it inevitably produces new problems as well.