August, 2005

An Economic Analysis of the SEC's Nationally Recognized Statistical Rating Organization (NRSRO) Standard

  • Jay Cochran

Key materials
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The Regulation

  • SEC's Nationally Recognized Statistical Rating Organization (NRSRO) Standard designates which credit ratings agencies are deemed "market recognized credible rating agencies."
  • NRSRO credit ratings are widely used benchmarks in other regulations (e.g., broker/dealer net capital requirements), and in private contracts (e.g., loan covenants).

Our Findings

  • There are currently five officially designated NRSROs: Moody's, Standard & Poor's (S&P), Fitch, Dominion Bond Rating Services, and A.M. Best.
  • The NRSRO Standard creates an effective barrier to entry for incumbent providers of financial ratings services, protecting them from competition.
  • The barrier's effects are observable through significantly higher returns on assets earned by the incumbents as compared to firms in competitive industries.

By the Numbers

  • Together, S&P and Moody's hold approximately 80% of the credit ratings market.
  • Moody's and S&P's ROAs averaged 37% and 39% respectively from 2000 through 2004, versus less than 10% for firms in competitively organized industries.


  • Remove the NRSRO barrier.
  • The SEC can provide a useful function to users of credit ratings by operating an information clearinghouse that furnishes data on accuracy and timeliness of ratings.