scholarly journals Information as a condition of justice in financial markets: The regulation of credit-rating agencies

2017 ◽  
Author(s):  
Boudewijn de Bruin
Keyword(s):  
Credit Risk ◽  
Financial Markets ◽  
Institutional Investors ◽  
Credit Rating ◽  
Credit Rating Agencies ◽  
Informational Needs ◽  
Sources Of Information ◽  
Rating Agencies ◽  
Mortgage Backed Securities

This chapter argues for deregulation of the credit-rating market. Credit-rating agencies are supposed to contribute to the informational needs of investors trading bonds. They provide ratings of debt issued by corporations and governments, as well as of structured debt instruments (e.g. mortgage-backed securities). As many academics, regulators, and commentators have pointed out, the ratings of structured instruments turned out to be highly inaccurate, and, as a result, they have argued for tighter regulation of the industry. This chapter shows, however, that the role of credit-rating agencies in achieving justice in finance is not as great as these commentators believe. It therefore argues instead for deregulation. Since the 1930s, lawgivers have unjustifiably elevated the rating agencies into official, legally binding sources of information concerning credit risk, thereby unjustifiably causing many institutional investors to outsource their epistemic responsibilities, that is, their responsibility to investigate credit risk themselves.

scholarly journals AN EMPIRICAL STUDY ON IMPACT OF CREDIT RATING ON CREDIT RISK OF BANKS: A LITERATURE REVIEW

2021 ◽  
pp. 31-37
Keyword(s):  
Literature Review ◽  
Credit Risk ◽  
Financial Markets ◽  
Credit Rating ◽  
Positive Impact ◽  
Credit Rating Agencies ◽  
Asymmetry Of Information ◽  
Rating Agencies ◽  
Research Gap ◽  
The Impact

In the financial markets, for investors, lenders, and issuers, credit rating agencies (CRAs) have a critical part in reducing the asymmetry of information between various parties. Credit ratings allow us to recognize the credit impending of a region's individuals. The paper clearly describes the role played in the establishment of a nation by credit rating agencies; there is a rise in new start-ups as all investors are rated favorably. Banks are helping to recognize the investment position of India. The main aim of the study is to analyze the research gap on the impact of credit rating on credit risk with a review of the literature. The study briefly explains the research gap which helps to analyze the factors which are responsible for credit risk. The study analyzes the definitions of basic terms, the origin of credit rating agencies’ objectives, and the scope of the present study and the literature review by assessing the credit rating users and examined the consequence of credit rating agencies on the Indian financial markets. Based on the nationwide and worldwide literature it is found that if the credit history of the investors is good then their credit score would be better and positive. It would also be incredibly convenient to collect loans. Finally, it is concluded that there is a positive impact of Credit Rating on Credit Risk of banking sectors in India.

Do Credit Ratings Move Toward The Market, Or Vice Versa?

2018 ◽  
Keyword(s):  
Credit Risk ◽  
Financial Markets ◽  
Credit Rating ◽  
Credit Ratings ◽  
Credit Rating Agencies ◽  
Rating Agencies ◽  
Market Signals

There are many different gauges of credit risk that investors can use to inform their decisions. Credit rating agencies have produced measures of credit risk for many decades, but financial markets also offer a guide to these risks. The authors examine the behavior of ratings relative to market signals on credit risk. In particular, the authors examine what happens when ratings and market signals differ, in terms of any subsequent convergence (or not). They find that, on average, market signals move more frequently toward ratings than vice versa. In terms of the magnitude of these movements, however, the picture is less clear. When market signals suggest lower credit risk than ratings do, they tend to close more of the gap; when ratings are higher than market signals, however, sometimes ratings close the gap more.

Part II The Financial Crisis of 2007–2011, 6 Market and Regulatory Failure

2018 ◽  
Author(s):  
Mccormick Roger ◽  
Stears Chris
Keyword(s):  
Risk Management ◽  
Financial Crisis ◽  
Credit Risk ◽  
Financial Market ◽  
Credit Rating ◽  
Third Party ◽  
Credit Rating Agencies ◽  
Rating Agencies ◽  
Market Participants ◽  
Regulatory Failure

This chapter first discusses the origins of the financial crisis, highlighting practice of ‘packaging and selling’ credit risk by financial market participants that led up to the crisis. It argues that although, in retrospect, many aspects of that practice look very bad indeed, the idea that banks might originate a credit exposure and then transfer the credit risk attached to it to a third party was, before the financial crisis, considered to be part and parcel of sound risk management. The discussion then turns to credit-rating agencies. Analysis of the financial crisis and ‘what went wrong’ has shown that rating agencies were too generous with their rating of many of the structured products that contributed to the collapse.

China's Emerging Credit Rating Industry: The Official Foundations of Private Authority

2008 ◽  
Vol 193 ◽  
pp. 65-83 ◽  
Author(s):  
Scott Kennedy
Keyword(s):  
Financial Markets ◽  
Stock Markets ◽  
Credit Rating ◽  
Credit Rating Agencies ◽  
Bond Ratings ◽  
Trade Associations ◽  
Rating Agencies ◽  
Market Participants ◽  
Private Authority ◽  
Private Actors

AbstractAlthough China has had difficulty improving the performance of its banks and stock markets, it has struggled even more to develop a credit rating industry. Credit rating agencies (CRA), which provide bond ratings, are vital to financial markets in advanced capitalist countries, but China's credit rating companies are weak and have had little influence over the behaviour of those who issue or invest in bonds. Some argue that CRAs gain authority through their strong reputation in the eyes of market participants, but the experience of rating agencies in China supports evidence from elsewhere that their private authority is largely dependent on government mandate, a benefit China's CRAs have only recently begun to enjoy. Many private actors, from trade associations to charity groups, are struggling to gain public influence in China, but credit rating agencies may be the best barometer to measure the Chinese government's general stance towards private authority.

A Bayesian inference model for the credit rating scale

2016 ◽  
Vol 17 (4) ◽  
pp. 390-404 ◽  
Author(s):  
Philipp Gmehling ◽  
Pierfrancesco La Mura
Keyword(s):  
Bayesian Inference ◽  
Credit Risk ◽  
Credit Rating ◽  
Rating Scale ◽  
Credit Rating Agencies ◽  
Model Framework ◽  
Content Type ◽  
Rating Agencies ◽  
Credit Rating Agency ◽  
Limited Accuracy

Purpose This paper aims to provide a theoretical explanation of why credit rating agencies typically disclose credit risk of issuers in classes rather than publishing the qualitative ranking those classes are based upon. Thus, its goal is to develop a better understanding of what determines the number and size of rating classes. Design/methodology/approach Investors expect ratings to be sufficiently accurate in estimating credit risk. In a theoretical model framework, it is therefore assumed that credit rating agencies, which observe credit risk with limited accuracy, are careful in not misclassifying an issuer with a lower credit quality to a higher rating class. This situation is analyzed as a Bayesian inference setting for the credit rating agencies. Findings A disclosure in intervals, typically used by credit rating agencies results from their objective of keeping misclassification errors sufficiently low in conjunction with the limited accuracy with which they observe credit risk. The number and size of the rating intervals depend in the model on how much accuracy the credit rating agencies can supply. Originality/value The paper uses Bayesian hypothesis testing to illustrate the link between limited accuracy of a credit rating agency and its disclosure of issuers’ credit risk in intervals. The findings that accuracy and the objective of avoiding misclassification determine the rating scale in this theoretical setting can lead to a better understanding of what influences the interval disclosure of major rating agencies observed in practice.

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