The Behavior of Credit-Rating Agencies During the Recent Global Financial Crisis

2019 ◽  
Author(s):  
Joel Spina
Keyword(s):  
Financial Crisis ◽  
Credit Rating ◽  
Global Financial Crisis ◽  
Credit Rating Agencies ◽  
Rating Agencies

scholarly journals A hard nut to crack: Regulatory failure shows how rating really works

2019 ◽  
Vol 23 (3) ◽  
pp. 266-286 ◽  
Author(s):  
Giulia Mennillo ◽  
Timothy J Sinclair
Keyword(s):  
Financial Crisis ◽  
Credit Rating ◽  
Global Financial Crisis ◽  
Third Party ◽  
Credit Rating Agencies ◽  
Private Goods ◽  
Rating Agencies ◽  
Rating Agency ◽  
Before And After ◽  
The Global Financial Crisis

Credit rating agencies such as Moody’s and Standard & Poor’s are key players in the governance of global financial markets. Given the very strong criticism the rating agencies faced in the wake of the global financial crisis 2008, how can we explain the puzzle of their survival? Market and regulatory reliance on ratings continues, despite the shift from a light-touch to a mandatory system of agency regulation and supervision. Drawing on the analysis of rating agency regulation in the US and the EU before and after the financial crisis, we argue that a pervasive, persistent and, in our view, erroneous understanding of rating has supported the never-ending story of rating agency authority. We show how treating ratings as metrics, private goods, and independent and neutral third-party opinions contributes to the ineffectiveness of rating agency regulation and supports the continuing authoritative standing of the credit rating agencies in market and regulatory practices.

scholarly journals Have Credit Rating Agencies Got a Role in Triggering 2007 Global Financial Crisis?

2015 ◽  
Author(s):  
Ersan Bocutoğlu
Keyword(s):  
Financial Crisis ◽  
Conflict Of Interest ◽  
Financial Services ◽  
Credit Rating ◽  
Global Financial Crisis ◽  
Credit Rating Agencies ◽  
Financial Services Industry ◽  
Main Function ◽  
Rating Agencies ◽  
Services Industry

The efforts for understanding the 2007 Global Financial Crisis requires more elaborated studies on the institutions, processes and other micro foundations of financial services industry instead of studies solely on mainstream business cycles theories that have obviously failed in understanding, explaining and predicting the crisis. This paper attempts to investigate whether or not credit rating agencies had played a triggering role in 2007 Global Financial Crisis. It is a study of parties, institutions and processes within financial services market. It is well documented that the credit rating agencies whose main function is to provide investors with information about the credit-worthiness of securities on which they plan to invest had hardly ever performed that function properly during the crisis. By changing their business models from ‘investor pays model’ to ‘issuer pays model’, they paved the way to conflict of interest and inevitably created chaos in financial services industry. Credit rating agencies doubtlessly are responsible for triggering the 2007 Global Financial Crisis. However it should be fair to emphasize also the responsibility of the US regulatory processes in emerging the conflict of interest in credit rating industry by giving some credit rating agencies an oligopoly power in the credit rating market and taking their credit ratings as the basic points of reference for regulatory purposes. It is obvious that the credit rating industry needs a reform.

Credit rating agencies and global financial crisis

2010 ◽  
Vol 27 (2) ◽  
pp. 161-174 ◽  
Author(s):  
Vassiliki L. Papaikonomou
Keyword(s):  
Financial Crisis ◽  
Credit Rating ◽  
Global Financial Crisis ◽  
Credit Rating Agencies ◽  
Rating Agencies

scholarly journals Examining the Behavior of Credit Rating Agencies Post 2008 Economic Turmoil

2017 ◽  
Vol 53 (4) ◽  
pp. 61-76
Author(s):  
Çağrı L. Uslu
Keyword(s):  
Financial Crisis ◽  
Emerging Markets ◽  
Credit Rating ◽  
Global Financial Crisis ◽  
Developed Countries ◽  
Credit Rating Agencies ◽  
Macroeconomic Variables ◽  
Rating Agencies ◽  
Macroeconomic Indicators ◽  
The Global Financial Crisis

AbstractThe demand for sovereign ratings has increased throughout last decades. Until the1990’s, credit rating agencies (CRAs) did not rate most of the emerging markets and the focus was almost only on developed countries, however, during this decade the number of sovereigns rated increased dramatically due to addition of emerging markets to the portfolio. The global financial crisis in 2008 led to the loss of credibility of these major credit rating companies. None of these three agencies showed any signal of macroeconomic problems in countries where the financial crisis created devastating macroeconomic results. It is believed that this failure has led credit rating agencies to behave more conservatively. This paper aims to determine whether CRAs tend to behave conservatively after the 2008 global financial crisis. If the downgrading is greater than the worsening of the economic situation in the given economies, then we can infer that CRAs tend to behave more conservatively. The good working model in estimating ratings assigned by CRAs before the crisis failed to estimate the ratings after 2008 crisis. This may have happened due to two reasons. First, as experienced in the aftermath of the former crisis, credit rating agencies may have added new macroeconomic variables in the process of assigning ratings or change the weight assigned to the already existing macroeconomic variables. Second, it is a known fact that ratings emerge from the combination of two distinct information; the quantitative part reflected by macroeconomic indicators and the qualitative judgements of the agency about the sovereign.

scholarly journals Credit rating agencies and moral hazard

2011 ◽  
Vol 58 (2) ◽  
pp. 219-227 ◽  
Author(s):  
Milos Bozovic ◽  
Branko Urosevic ◽  
Bosko Zivkovic
Keyword(s):  
Financial Crisis ◽  
Moral Hazard ◽  
Credit Risk ◽  
Credit Rating ◽  
Global Financial Crisis ◽  
Credit Rating Agencies ◽  
Rating Agencies ◽  
Structured Products ◽  
The Global Financial Crisis ◽  
Financial Securities

The failure of credit rating agencies to properly assess risks of complex financial securities was instrumental in setting off the global financial crisis. This paper studies the incentives of companies and rating agencies and argues that the way the current rating market is organized may provide agencies with intrinsic disincentives to accurately report credit risk of securities they rate. Informational inefficiency is only enhanced when rating agencies function as an oligopoly or when they rate structured products. We discuss possible market and regulatory solutions to these problems.

scholarly journals Determination of Sovereign Credit Rating Model for European Countries

2021 ◽  
Vol 5 (3) ◽  
Author(s):  
Isik Akin
Keyword(s):  
Financial Crisis ◽  
Credit Rating ◽  
Global Financial Crisis ◽  
Credit Ratings ◽  
Developed Countries ◽  
Credit Rating Agencies ◽  
Rating Agencies ◽  
Sovereign Credit ◽  
Rating Model ◽  
Sovereign Credit Rating

Credit rating agencies play a key role in financial markets, as they help to reduce asymmetric information among market participants via credit ratings. The credit ratings determined by the credit rating agencies reflect the opinion of whether a country can fulfil the liability or its credit reliability at a particular time. Therefore, credit ratings are a very valuable tool, especially for investors. In addition, the issue that credit rating agencies are generally criticised is that they are unsuccessful in times of financial crisis. Credit rating methodologies of credit rating agencies have been subject to intense criticism, especially after the 2007/08 Global Financial Crisis. Some of the criticised issues are that credit rating agencies’ methodologies are not transparent; they are unable to make ratings on time, and they make incorrect ratings. In order to create a more reliable credit rating methodology, the credit rating industry and the ratings determined by rating agencies need to be critically examined and further investigated in this area. For this reason, in this study credit rating model has been developed for countries. Supervisory and regulatory variables, political indicators and macroeconomic factors were used as independent variables for the sovereign credit rating model. As a result of the study, the new sovereign credit rating calculates exactly the same credit rating with Fitch Rating Agency for developed countries, but there are 1 or 2 points differences for developing countries. In order to better understand the reason for these differences, credit rating agencies need to make their methodologies more transparent and disclose them to the public.

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.

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