Regulating credit rating agencies: The issue of conflicts of interest in the rating of structured finance products

2010 ◽  
Vol 12 (1) ◽  
pp. 1-23 ◽  
Author(s):  
Tobias Johansson
Keyword(s):  
Credit Rating ◽  
Conflicts Of Interest ◽  
Credit Rating Agencies ◽  
Structured Finance ◽  
Rating Agencies

Credit Rating Agencies in Capital Markets: A Review of Research Evidence on Selected Criticisms of the Agencies

2007 ◽  
Vol 22 (3) ◽  
pp. 469-492 ◽  
Author(s):  
Carol Ann Frost
Keyword(s):  
Credit Rating ◽  
Conflicts Of Interest ◽  
Securities And Exchange Commission ◽  
Future Research ◽  
Minor Role ◽  
Credit Rating Agencies ◽  
Regulatory Oversight ◽  
Rating Agencies ◽  
Accounting Scandals ◽  
A Minor

This study assesses the validity of widespread criticisms of the large, “nationally recognized” credit rating agencies (CRAs). The accounting scandals of 2000-02, in particular the highly publicized failure of Enron in December 2001, led many to question their competence and the value of their ratings. This paper evaluates important criticisms of the CRAs discussed in a recent Securities and Exchange Commission (SEC) staff report by using evidence from empirical research studies, and suggests many promising subjects for future research. The analysis given in this paper, and the results of the suggested research (when available), should be of particular interest to lawmakers and regulators who are responsible for determining whether and to what extent the credit rating industry should be subject to statutory and regulatory oversight. Although little rigorously gathered empirical evidence supports the criticisms, many issues remain unresolved. Powerful tests related to potential conflicts of interest and alleged unfair practices are exceptionally difficult to design, and the alleged deficiencies of rating agencies' disclosure practices have yet to be analyzed. Finally, many criticisms are based on subjective benchmarks that are difficult to quantify and open to question. To date, however, accounting researchers have played only a minor role in the debate. Because they are well-versed in such areas as disclosure analysis, capital market tests, and the operation of financial intermediaries and external auditors, these researchers potentially have much to add in this regard.

scholarly journals Lessons From The Current Financial Crisis: Should Credit Rating Agencies Be Re-Structured?

2010 ◽  
Vol 8 (7) ◽  
Author(s):  
Josh Wolfson ◽  
Corinne Crawford
Keyword(s):  
Credit Rating ◽  
Conflicts Of Interest ◽  
The United States ◽  
Business Community ◽  
Credit Rating Agencies ◽  
Housing Bubble ◽  
Rating Agencies ◽  
Total Lack ◽  
Current Financial Crisis ◽  
Asset Backed Securities

<p class="MsoNormal" style="text-align: justify; line-height: normal; margin: 0in 0.5in 0pt; mso-pagination: none;"><span style="font-family: &quot;Times New Roman&quot;,&quot;serif&quot;; color: black; font-size: 10pt; mso-themecolor: text1;">Credit rating agencies are considered the gatekeepers to the financial markets; however, these agencies have come under increasing attack in the past few years by investors, regulators and the business community.<span style="mso-spacerun: yes;">&nbsp; </span>The United States Senate has accused the credit rating agencies of flawed methodology, weak oversight by regulators, conflicts of interest and a total lack of transparency.<span style="mso-spacerun: yes;">&nbsp; </span>The Senate review concluded that the problems with the credit rating agencies were responsible for contributing to the housing bubble by awarding AAA ratings to complex, unsafe asset backed securities and other derivatives, thereby magnifying the financial shock when the housing bubble finally burst. In this article, we will explore how the credit rating agencies obtained, and, as many feel, misused their power.<span style="mso-spacerun: yes;">&nbsp; </span>In addition, we will outline currently proposed legislative and regulatory solutions.</span></p>

Credit coordinate ratings with corresponding credit rating agencies and regulations

2014 ◽  
Vol 01 (01) ◽  
pp. 1450002 ◽  
Author(s):  
Weiping Li
Keyword(s):  
Voluntary Disclosure ◽  
Credit Rating ◽  
Conflicts Of Interest ◽  
Natural Extension ◽  
Necessary Condition ◽  
Credit Rating Agencies ◽  
No Arbitrage ◽  
Absolute Value ◽  
Rating Agencies ◽  
Default Rate

This paper develops a coordinate rating for Credit Rating Agencies (CRAs) in the rating market. We first show that there is a necessary condition for the restructured sub-portfolios to have no-arbitrage principle for coordinate ratings. The coordinate rating is not only a natural extension of a single rating, but also reduces the rating bias and increases the rating accuracy. We solve the voluntary-disclosure decision problem for the issuer in terms of coordinate ratings. Furthermore, we show that the complexities of sub-portfolios do reduce the incentive to shop for the coordinate rating by comparing it with the incentive to shop for a single rating. The correlation among sub-portfolios also affect the incentive to shop in the coordinate rating. We advocate four principles for the credit rating system, from adapting coordinate ratings and reducing conflicts of interest to encouraging competition among CRAs and ensuring incentive alignment. We also build a model with disapproval correlation among CRAs and show that the probability of the joint disapproval is extremely sensitive to the disapproval correlation, even though the correlation may be very small in absolute value. Under an approval arrangement from the regulator in terms of the default rate within a CRA, we show that there exists a sub-game perfect equilibrium in which both approved CRAs provide correct coordinate ratings.

scholarly journals Appropriating rhetoric: a beginner’s guide

2020 ◽  
Vol 64 (3) ◽  
pp. 383-395
Author(s):  
Clare L Fisher Williams
Keyword(s):  
Credit Rating ◽  
Social Role ◽  
Conflicts Of Interest ◽  
Real Life ◽  
Social Position ◽  
Credit Rating Agencies ◽  
Power Structures ◽  
Rating Agencies ◽  
Normative Authority ◽  
Power Differentials

This paper examines the importance of the speaker – the agent – in the construction of dialogue. Within the rhetoric used by each agent are power constructs which display the speaker’s position in society (role). The rhetoric used by that agent in the process of fulfilling that social role is particular to that setting in spacetime. However, what happens when another agent in a different social position appropriates that rhetoric? The framing of the dialogue changes and the hidden power structures revealed and altered. To what extent does the new agent appropriate the first speaker’s normative authority? What impact does this have on the rhetoric itself ? In this discussion I take a real-life example of the appropriation of rhetoric from the ongoing Eurozone downgrade debates. I use McCloskey’s theory of rhetoric, or ‘sweet talk’, to uncover the normative bias of the discourse, and set the dialogue within Giddens’ structuration framework to highlight the importance oflanguage, locale and the agent. The analysis highlights power differentials that are indicative of conflicts of interest in the regulation of credit-rating agencies and the debate asks what this means for future action.

scholarly journals Rated P for Public

2020 ◽  
Vol 2020 (2) ◽  
Author(s):  
Parth Kalaria
Keyword(s):  
Credit Rating ◽  
Conflicts Of Interest ◽  
The United States ◽  
Lessons Learned ◽  
Credit Rating Agencies ◽  
Wall Street ◽  
2008 Financial Crisis ◽  
Public Agency ◽  
Rating Agencies ◽  
Consumer Protection Act

Credit rating agencies have long played an important rolein the economy of the United States. In response to thefinancial crisis of 2008, the Dodd-Frank Wall Street Reformand Consumer Protection Act introduced reforms to increasethe transparency and accountability of credit rating agencies.With the rise of cryptocurrencies and the expansion ofblockchain technology, established credit rating agencies arenow considering offering ratings for cryptocurrencies, in thesame way they rate traditional securities. Borrowing from the lessons learned from the experience ofthe 2008 financial crisis, this Note proposes that the UnitedStates government create a public agency to providecryptocurrency ratings. The Note begins by providingbackground information on cryptocurrencies, blockchaintechnology, credit rating agencies, and the subprime mortgagecrisis of 2008. Next, it discusses problems in the credit ratingprocess that were not solved by Dodd-Frank—namely, theprevalence of fraud and conflicts of interest between ratingagencies and issuers. The Note then proposes the publiccryptocurrency rating agency solution and additionalsupplementary reforms that may be adopted to address these unsolved problems.

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