The Independence Of Credit Rating Agencies

The Independence of Credit Rating Agencies focuses on the institutional and regulatory dynamics of these agencies, asking whether their business models give them enough independence to make viable judgments without risking their own profitability. Few have closely examined the analytical methods of credit rating agencies, even though their decisions can move markets, open or close the doors to capital, and bring down governments. The 2008 financial crisis highlighted their importance and their shortcomings, especially when they misjudged the structured financial products that precipitated the collapse of Bear Stearns and other companies. This book examines the roles played by rating agencies during the financial crisis, illuminating the differences between U.S. and European rating markets, and also considers subjects such as the history of rating agencies and the roles played by smaller agencies to present a well-rounded portrait. Reports on one of the key causes of the 2008 financial crisis: agencies that failed to understand how to analyze financial products Describes inherent business model and pricing conflicts that compromise the independence of credit rating agencies Reveals how rating agencies large and small, regulatory bodies, and vested interests interact in setting fees and policies

Seminar paper from the year 2011 in the subject Business economics - Controlling, grade: 2,0, Rhine-Waal University of Applied Sciences, language: English, abstract: Since the financial crisis in 2008, rating agencies are in the spotlight. Often they were blamed by politicians and economists for causing the crisis, because they rated some financial products with an excellent grade, without exactly knowing what was really behind these products. To understand why and how Credit Rating Agencies like Standard & Poors, Fitch and Moody's rate, we have to look closer at the CRA and their rating in order to understand how they work. In this research paper I will take a critical look at these institutions. I will talk about the independence of these global oriented enterprises and I will analyze their impact on the financial market and the politics in order to demonstrate why they are so powerful like quoted above.

The overly optimistic debt ratings provided by credit rating agencies (CRAs) and the lack of transparency about the rating process have been criticized by regulators and pundits for exacerbating the financial crisis. We conduct a mixed-design experiment exploring how two proposals advanced by lawmakers affect the behavior of credit rating analysts. Using data taken from personal lending site Prosper.com, we examine whether (a) the requirement to justify departures from a quantitative model, and (b) conflicts of interests stemming from who pays the analysts affect rating characteristics. We then examine how justifying departures in turn influences the conflicts of interest faced by credit raters. We find that justifying departures reduces the likelihood that credit raters deviate from a quantitative model. Furthermore, credit raters who are not required to justify departures from the model tend to depart from the model in a direction that benefits the borrower, but only in the “borrower pays” condition. Additionally, credit raters facing conflict of interest appear to behave strategically and are less willing to lend their own money to borrowers, even if these credit raters assign more favorable ratings to these same borrowers. This study complements the existing archival literature on credit rating agencies and the conflicts of interest facing these agencies. Results of this study may inform regulators regarding the effectiveness of the different proposals on CRA reform.

This study provides a comprehensive analysis of credit rating economics and draws conclusions on the nature of regulation. It starts with an overview of the credit rating industry and introduces a framework that structures multiple rating agency functions. At the heart of the credit rating business model lies the reputation mechanism, which is analyzed in detail. After analyzing the reputation mechanism, the study takes a wider look at the industry and identifies the forces behind credit rating supply and demand. From an industrial organization perspective competition in the credit rating industry is limited. A comprehensive review of potential reasons for regulating the credit rating industry, however, reveals that there are only few compelling arguments. The regulatory approaches of the EU under the Capital Requirements Directive of 2005 and the USA under the Credit Rating Agency Reform Act of 2006 are contrasted against an optimal regulatory regime.

Credit rating agencies play a critical role in capital markets, guiding the asset allocation of institutional investors as private capital moves freely around the world in search of the best trade-off between risk and return. However, they have also been strongly criticised for failing to spot the Asian crisis in the early 1990s, the Enron, WorldCom and Parmalat collapses in the early 2000s and finally for their ratings of subprime-related structured finance instruments and their role in the current financial crisis. This book is a guide to ratings, the ratings industry and the mechanics and economics of obtaining a rating. It sheds light on the role that the agencies play in the international financial markets. It avoids the sensationalist approach often associated with studies of rating scandals and the financial crisis, and instead provides an objective and critical analysis of the business of ratings. The book will be of practical use to any individual who has to deal with ratings and the ratings industry in their day-to-day job. Reviews "Rating agencies fulfil an important role in the capital markets, but given their power, they are frequently the object of criticism. Some of it is justified but most of it portrays a lack of understanding of their business. In their book The Rating Agencies and their Credit Ratings, Herwig and Patricia Langohr provide an excellent economic background to the role of rating agencies and also a thorough understanding of their business and the problems they face. I recommend this book to all those who have an interest in this somewhat arcane but extremely important area." -Robin Monro-Davies, Former CEO, Fitch Ratings. "At a time of unprecedented public and political scrutiny of the effectiveness and indeed the basic business model of the Credit Rating industry, and heightened concerns regarding the transparency and accountability of the leading agencies, this book provides a commendably comprehensive overview, and should provide invaluable assistance in the ongoing debate." -Rupert Atkinson, Managing Director, Head of Credit Advisory Group, Morgan Stanley and member of the SIFMA Rating Agency Task Force "The Langohrs have provided useful information in a field where one frequently finds only opinions or misconceptions. They supply a firm base from which to understand changes now underway. A well-read copy of this monograph should be close to the desk of every investor, issuer and financial regulator, legislator or commentator." -John Grout, Policy and Technical Director, The Association of Corporate Treasurers

The global crisis revealed that credit rating agencies (CRAs) are capable of bringing about potential distortions in the financial sector, thereby resulting in a reduction in market confidence which, in turn, influences negotiations and expectations. CRAs need to be held accountable for lack of transparency and inaccurate ratings, however the existing regulatory framework does not secure adequate investor protection. This book provides a new and important contribution to research in the area, at a crucial time in the debate around financial regulation and investment regimes.

Credit rating agencies have been criticized for their role in the financial crisis by understating credit risk. The US subprime mortgage crisis highlighted the systemic relevance of the rating agencies and the deficiencies in their activities; this led to an international consensus to regulate the rating business. Written by those involved in developing European Legislation, this book explains EU Regulation in the context of global initiatives undertaken by the G-20, the Financial Stability Board, and IOSCO to address failures within the rating industry. Through an in-depth analysis of the EU Regulation's requirements on governance, conflicts of interest, methodologies, and transparency, the book provides a clear explanation of how rating agencies operate and how the identified failures have been addressed. Moreover, it examines the supervisory and enforcement powers of ESMA, the EU authority in charge of the registration and oversight of rating agencies. This is complemented with an analysis of guidance from supervisors (ESMA and EBA), IOSCO's recommendations, and US legislation. The book discusses possible new regulatory developments in areas such as the agencies' business model, competition, civil liability, and ratings of sovereign debt, in light of the Euro debt sovereign crisis. It concludes with the authors' support for an enhanced regulatory and oversight coordination at international level and for the implementation of the necessary steps to reduce the existing over-reliance on ratings.

The book examines the role of credit rating agencies (CRAs) in the subprime mortgage crisis. The CRAs are blamed for awarding risky securities ‘3-A’ investment grade status and then failing to downgrade them quickly enough when circumstances changed, which led to investors suffering substantial losses. The causes identified by the regulators for the gatekeeper failure were conflicts of interest (as the issuers of these securities pay for the ratings); lack of competition (as the Big Three CRAs have dominated the market share); and lack of regulation for CRAs. The book examines how the regulators, both in the US and EU, have sought to address these problems by introducing soft law self-regulation in accordance with the International Organisation of Securities Commissions Code and hard law statutory regulation, such as that found in the “Reform Act” and “Dodd-Frank Act” in the US and similar provisions in the EU. The highly topical book examines these provisions in detail by using a doctrinal black-letter law method to assess the success of the regulators in redressing the problems identified. It also examines the US case law regulation relating to the legal liability of CRAs. The book examines whether the regulations introduced have had a deterrent effect on the actions of CRAs, whether investors are compensated for their losses, and how the regulators have dealt with the issues of conflicts of interest and an anti-competitive environment. Should liability be introduced for CRAs through changes in the law so as to compel them to issue reliable ratings and solve the current problems? The book seeks to simplify the complex issues involved and is backed by concrete evidence; as such, it will appeal to both the well-informed and the lay general public who are interested in learning more about the role of CRAs in the sub-prime mortgage crisis and regulators’ attempts to remedy the situation. Novice readers can familiarise themselves with the legal and financial terminology used by referring to the glossary at the end of the book.

Credit ratings agencies play an important role in the world-wide capital markets and, willingly or not, influence rather significantly the destinies of private and public financial players and their issues. Credit rating agencies invoke reputation as their most valuable asset and as guarantee for their independence and honesty in the intermediation of financial information. Yet the accuracy and honesty of credit ratings have been, nonetheless, questioned at numerous times, and the lack thereof was pointed as one of the causes of recent crises affecting the global financial system. Using legal and economic analysis, this article demonstrates how reputation works in the credit rating business to encourage rating accuracy and how governmental actions - mainly by the massive use of ratings in laws and regulations - were responsible for rendering the reputational mechanism ineffective. Considering the factors which influence the trade-off faced by rating agencies, the movements towards regulation and oversight of these entities in the U.S. and in the EU are comparatively analyzed. The paper concludes that restoring the strength of the reputation mechanism, notably by eliminating regulatory reliance on ratings and rating safe-harbors, is the only effective measure to ensure rating accuracy - as well as the only measure really consistent with the public goals of increasing competition in the informational business, fostering innovation and better risk management by investors, improving accountability in capital markets and ensuring that investors are encouraged to rely on ratings only when ratings are deemed reliable. It then argues that, even though regulation and oversight of rating agencies might have been unavoidable at this point in time, deregulation of the rating business, once regulatory reliance is eliminated, is also indispensable to secure the aforementioned goals.

Developed country capital markets have devised a set of institutions and actors to help provide investors with timely and accurate information they need to make informed investment decisions. These actors have become known as "financial gatekeepers" and include auditors, financial analysts, and credit rating agencies. Corporate financial reporting scandals in the United States and elsewhere in recent years, however, have called into question the sufficiency of the legal framework governing these gatekeepers. Policymakers have since responded by imposing a series of new obligations, restrictions, and punishments—all with the purpose of strengthening investor confidence in these important actors. F inancial Gatekeepers provides an in-depth look at these new frameworks, especially in the United States and Japan. How have they worked? Are further refinements appropriate? These are among the questions addressed in this timely and important volume. Contributors include Leslie Boni (University of New Mexico), Barry Bosworth (Brookings Institution), Tomoo Inoue (Seikei University), Zoe-Vonna Palmrose (University of Southern California), Frank Partnoy (University of San Diego School of Law), George Perry (Brookings Institution), Justin Pettit (UBS), Paul Stevens (Investment Company Institute), Peter Wallison (American Enterprise Institute)

Seminar paper from the year 2011 in the subject Economics - Finance, , course: Bank Financial Management, language: English, abstract: This report is examining the role of credit rating agencies and in further details arguments in its favor and against its favor are examined. In the beginning the role of credit rating agencies is defined and later methodological approaches to this topic are discussed, and afterwards, an analysis of pros and cons of credit rating agencies is conducted. To the end recommendations and suggestions to credit rating agencies for better performances are listed. Generally, credit rating agencies are playing vital role in markets and they united dispersed information comprehensively. Through this approach it is easier for investors or issuers to understand the real position of different concerns before taking any final decisions, beside this fact it is also in observation that credit rating agencies have some flaws which need to be addressed, like favoritism and unsolicited credit rating issuance. It is recommended to have transparency, scheduled active ratings and strict follow up with regulated authorities.

øŠAline Darbellay analyzes the obvious system relevance of credit rating agencies in depth and assesses the possible options for regulatory responses to this systemic issue. Thereby, the book is based on a fruitful comparative legal approach and formul

This book details the difference between the two rating industries, but this difference is converging all the time. The concept of investing in a more responsible and sustainable manner is drawing in some of the world’s leading investors and, with it, regulations and policies are developing at the highest levels. However, the market is not getting what it needs to fully submit to the concept of responsible investing. It has called for more to be done from those tasked with injecting information into their processes, and two industries in particular have been identified as being natural partners. It has been suggested that they are on a collision course to serve the mainstream investor, and in this book, that collision course is contextualised, explained, presented, and finally its outcome predicted.

This book examines the transgressions of the credit rating agencies before, during and after the recent financial crisis. It proposes that by restricting the agencies’ ability to offer ancillary services there stands the opportunity to limit, in an achievable and practical manner, the potentially negative effect that the Big Three rating agencies – Standard & Poor’s, Moody’s and Fitch – may have upon the financial sector and society moreover. The book contains an extensive and in-depth discussion about how the agencies ascended to their current position, why they were able to do so and ultimately their behaviour once their position was cemented. This work offers a new framework for the reader to follow, suggesting that investors, issuers and the state have a ‘desired’ version of the agencies in their thinking and operate upon that basis when, in fact, those imagined agencies do not exist, as demonstrated by the ‘actual’ conduct of the agencies. The book primarily aims to uncover this divergence and reveal the ‘real’ credit rating agencies, and then on that basis propose a real and potentially achievable reform to limit the negative effects that result from poor performance in this Industry. It addresses the topics with regard to financial regulation and the financial crisis, and will be of interest to legal scholars interested in the intersection between business and he law as well as researchers, academics, policymakers, industry and professional associations and students in the fields of corporate law, banking and finance law, financial regulation, corporate governance and corporate finance.