The role and responsibility of credit rating agencies in promoting soundness and integrity

2014 ◽  
Vol 17 (1) ◽  
pp. 34-49 ◽  
Author(s):  
Graeme Baber
Keyword(s):  
Design Methodology ◽  
Credit Rating ◽  
Credit Ratings ◽  
Code Of Conduct ◽  
Specific Aspect ◽  
International Organization ◽  
Credit Rating Agencies ◽  
Content Type ◽  
Rating Agencies ◽  
Rating Process

Purpose – The purpose of this paper is to investigate the role and responsibility of credit rating agencies in promoting soundness and integrity, especially in the course of their business activities. Design/methodology/approach – The paper describes, and uses, the framework for the activities of credit rating agencies introduced by the International Organization of Securities Commissions (IOSCO), in order to give effect to this investigation. Findings – Credit rating agencies have implemented the provisions of the Code of Conduct Fundamentals for Credit Rating Agencies of the IOSCO on the quality and integrity of the rating process, to the extent of the resources available to them. Research limitations/implications – The main source of data is the information collected by the IOSCO from nine credit rating agencies, including the main three, on the quality and integrity of their rating processes. The absence of triangulation of research methods limits the robustness of the findings. Originality/value – The paper addresses a specific aspect of the credit ratings story since the financial crisis on which there is currently little in the literature. It also focuses upon the actions of credit rating agencies, rather than on how these organisations are, or should be, regulated.

Strengthening credit rating integrity

2015 ◽  
Vol 23 (4) ◽  
pp. 338-353 ◽  
Author(s):  
Mark Adelson ◽  
David Jacob
Keyword(s):  
Design Methodology ◽  
Credit Rating ◽  
Credit Ratings ◽  
Credit Rating Agencies ◽  
Content Type ◽  
Rating Agencies ◽  
Similar Work ◽  
Sales And Marketing ◽  
Key Features ◽  
Rating Criteria

Purpose – The purpose of the article is to explain the significance of key features of the SEC’s new rules for credit rating agencies. Those rules include three key items: they prohibit the influence of sales or marketing considerations on criteria development; they include guidance that preserves the ability of ratings to serve as relative rather than absolute measures of credit risk; and they require cross-sector consistency of rating symbols. When they were released the significance of the rules was under-appreciated because of other simultaneous regulatory announcements. Design/methodology/approach – The approach is to consider how effectively the rules address their target issues. In doing so the article explores how the final rules evolved from their original proposed form and from the statutory specifications in the 2010 Dodd-Frank Act. Findings – The new rules should promote the integrity of credit ratings in the future. They should be effective in reducing the influence of sales and marketing considerations on the development of rating criteria. In addition they should enhance rating integrity through superior cross-sector consistency in the meanings of rating symbols while allowing rating agencies to maintain their traditional emphasis on relative risk. Originality/value – The authors are not aware of any similar work assessing the selected provisions of the new SEC rules for credit rating agencies.

A comparative study of economic growth as a key determinant of sovereign credit ratings in Africa

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Misheck Mutize ◽  
McBride Peter Nkhalamba
Keyword(s):  
Economic Growth ◽  
Credit Rating ◽  
Credit Ratings ◽  
Credit Rating Agencies ◽  
African Union ◽  
African Countries ◽  
Content Type ◽  
Rating Agencies ◽  
Sovereign Credit ◽  
Sovereign Credit Ratings

PurposeThis study is a comparative analysis of the magnitude of economic growth as a key determinant of long-term foreign currency sovereign credit ratings in 30 countries in Africa, Europe, Asia and Latin America from 2010 to 2018.Design/methodology/approachThe analysis applies the fixed effects (FE) and random effects (RE) panel least squares (PLS) models.FindingsThe authors find that the magnitude economic coefficients are marginally small for African countries compared to other developing countries in Asia, Europe and Latin America. Results of the probit and logit binary estimation models show positive coefficients for economic growth sub-factors for non-African countries (developing and developed) compared to negative coefficients for African countries.Practical implicationsThese findings mean that, an increase in economic growth in Africa does not significantly increase the likelihood that sovereign credit ratings will be upgraded. This implies that there is lack of uniformity in the application of the economic growth determinant despite the claims of a consistent framework by rating agencies. Thus, macroeconomic factors are relatively less important in determining country's risk profile in Africa than in other developing and developed countries.Originality/valueFirst, studies that investigate the accuracy of sovereign credit rating indicators and risk factors in Africa are rare. This study is a key literature at the time when the majority of African countries are exploring the window of sovereign bonds as an alternative funding model to the traditional concessionary borrowings from multilateral institutions. On the other hand, the persistent poor rating is driving the cost of sovereign bonds to unreasonably high levels, invariably threatening their hopes of diversifying funding options. Second, there is criticism that the rating assessments of the credit rating agencies are biased in favour of developed countries and there is a gap in literature on studies that explore the whether the credit rating agencies are biased against African countries. This paper thus explores the rationale behind the African Union Decision Assembly/AU/Dec.631 (XXVIII) adopted by the 28th Ordinary Session of the African Union held in Addis Ababa, Ethiopia in January 2017 (African Union, 2017), directing its specialized governance agency, the African Peer Review Mechanism (APRM), to provide support to its Member States in the field of international credit rating agencies. The Assembly of African Heads of State and Government highlight that African countries are facing the challenges of credit downgrades despite an average positive economic growth. Lastly, the paper makes contribution to the argument that the majority of African countries are unfairly rated by international credit rating agencies, raising a discussion of the possibility of establishing a Pan-African credit rating institution.

The relevance of credit ratings over the business cycle

2016 ◽  
Vol 17 (2) ◽  
pp. 152-168
Author(s):  
Christian Fieberg ◽  
Richard Lennart Mertens ◽  
Thorsten Poddig
Keyword(s):  
Business Cycle ◽  
Agency Costs ◽  
Credit Rating ◽  
Credit Ratings ◽  
Credit Rating Agencies ◽  
Cross Sectional ◽  
Content Type ◽  
Rating Agencies ◽  
The Business Cycle ◽  
Rating Changes

Purpose Credit market models and the microstructure theory of the ratings market suggest that information provided by credit rating agencies becomes more relevant in recessions when agency costs are high and less relevant in expansions when agency costs are low. The purpose of this paper is to empirically test these hypotheses with regard to equity markets. Design/methodology/approach The authors use business cycle identification algorithms to map rating events (credit rating changes and watchlist inclusions) to business cycle phases and apply the event study methodology. The results are backed by cross-sectional regressions using a variety of control variables. Findings The authors find that the relevance of information provided by credit rating agencies for equity prices heavily depends on the level of agency costs. Furthermore, the authors detect a “flight-to-quality” during recessions in the speculative grade segment and a weakened relevance of rating events in expansions in the investment grade segment. Originality/value This paper is the first to empirically analyse how equity investors perceive credit rating changes and watchlist inclusions over the business cycle. In the empirical analysis, the authors use a large sample of about 25,000 rating events in all Organisation for Economic Co-operation and Development markets. The presented results underline that credit ratings address the agency problem in financial markets and can thus be regarded as useful for risk management or regulation.

scholarly journals Can credit rating agencies play a greater role in corporate governance disclosure?

2018 ◽  
Vol 18 (5) ◽  
pp. 954-964 ◽  
Author(s):  
Daniel Cash
Keyword(s):  
Corporate Governance ◽  
European Commission ◽  
Design Methodology ◽  
Credit Rating ◽  
Methodological Approach ◽  
Credit Rating Agencies ◽  
Content Type ◽  
Rating Agencies ◽  
Governance Disclosure ◽  
Comply Or Explain

Purpose The European Commission (EC) is currently examining methods to increase the effectiveness of corporate governance disclosures. This paper aims to examine whether the credit rating agencies (CRAs), both on account of their influence within the marketplace and also their methodological approach to rating Governance, may have a greater role to play in the EC achieving those particular objectives. Design/methodology/approach This paper is based upon a normative methodology, upon which the issue is contextualised and a proposal is put forward regarding a methodological alteration that can be instituted by the CRAs. Findings The paper finds that the CRAs may have a much greater role to play in meeting the objectives of the EC. Whilst the EC is focusing upon regulatory monitoring, the paper finds that there is a potential for a more efficient model within which the CRAs adapt their methodologies to include corporate governance disclosure into their rating processes. Originality/value In presenting the idea that the comply or explain principles put forward by the EC are proving to be somewhat ineffective, the paper contributes to the field by suggesting there are private endeavours which may add a sense of impact to disclosure proceedings, rather than the purely public regime being envisioned.

scholarly journals Forecasting Credit Ratings of EU Banks

2020 ◽  
Vol 8 (3) ◽  
pp. 49
Author(s):  
Vasilios Plakandaras ◽  
Periklis Gogas ◽  
Theophilos Papadimitriou ◽  
Efterpi Doumpa ◽  
Maria Stefanidou
Keyword(s):  
Credit Rating ◽  
Credit Ratings ◽  
Support Vector ◽  
Credit Rating Agencies ◽  
Selection Scheme ◽  
Explanatory Variables ◽  
Rating Agencies ◽  
Financial Variables ◽  
Forecasting Models ◽  
Banking Institutions

The aim of this study is to forecast credit ratings of E.U. banking institutions, as dictated by Credit Rating Agencies (CRAs). To do so, we developed alternative forecasting models that determine the non-disclosed criteria used in rating. We compiled a sample of 112 E.U. banking institutions, including their Fitch assigned ratings for 2017 and the publicly available information from their corresponding financial statements spanning the period 2013 to 2016, that lead to the corresponding ratings. Our assessment is based on identifying the financial variables that are relevant to forecasting the ratings and the rating methodology used. In the empirical section, we employed a vigorous variable selection scheme prior to training both Probit and Support Vector Machines (SVM) models, given that the latter originates from the area of machine learning and is gaining popularity among economists and CRAs. Our results show that the most accurate, in terms of in-sample forecasting, is an SVM model coupled with the nonlinear RBF kernel that identifies correctly 91.07% of the banks’ ratings, using only 8 explanatory variables. Our findings suggest that a forecasting model based solely on publicly available financial information can adhere closely to the official ratings produced by Fitch. This provides evidence that the actual assessment procedures of the Credit Rating Agencies can be fairly accurately proxied by forecasting models based on freely available data and information on undisclosed information is of lower importance.

US rating agency reform to rest on enforcement

2016 ◽  
Keyword(s):  
Business Model ◽  
Global Economy ◽  
Annual Report ◽  
Credit Rating ◽  
Credit Ratings ◽  
Securities And Exchange Commission ◽  
Political Support ◽  
Political Debate ◽  
Content Type ◽  
Rating Agencies

Subject The latest annual report of the Securities and Exchange Commission (SEC) on credit ratings agencies (CRAs). Significance The latest annual report of the Securities and Exchange Commission (SEC) on credit rating agencies (CRAs) suggests that practices that contributed to the 2007-08 financial crisis persist, and that the prevailing CRA business model continues to incentivise high credit ratings rather than accurate ones. The underlying conflict of interest inherent in the prevailing CRA business model is well-recognised, but there is a lack of broad political support to address the problem. Impacts The report will increase pressure on the SEC to strengthen its CRA enforcement policy. The report is shaping the terms of political debate and providing fodder, especially for Democratic presidential candidate Bernie Sanders. Renewed financial market turbulence and strains in the global economy could provide fresh tests for CRAs.

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