Credit Rating Agencies

1620 Words7 Pages
1. Identify the key reasons why did the rating agencies fail? Following are the major reasons for the failure of the rating agencies: ● Standard and Poor’s, Moody’s and Fitch Group, otherwise referred to as the “big-three” credit-rating agencies, maintain an oligopolistic pricing and practise dominance within the global market, which may starve competition from access to market share. ● Failure to maintain diligent market conduct could be attributed to the competitive market environment which provided an incentive for the issuers to seek alternative opportunities e.g. credit ratings shopping. ● Complex financial instruments and inaccurate methodology in assessing and evaluating credit risk associated with securitization e.g. ABS, CDOs, RMBS marketability and other financially engineered instruments including credit derivatives. ● Failure to regulate internal surveillance procedures, and to monitor credit risk assessment and quantitative methodology deficiencies e.g. underlying creditworthiness and excessive risk exposure derived from securitized tranches. ● An underestimated conflict of interest combined the requirement to rate financial instruments accurately, provide appropriate and suitable service for the client, and achieve market incentives and remuneration e.g. SEC cannot second-guess CRA. ● Inability to exercise proper due diligence and misappropriated risk management practise attributed to increase in complexity associated with structured finance e.g. accountability, conduct violation and timely release. 2. CRAs assign sovereign ratings to countries. Why is sovereign risk important? Why should countries care about their sovereign debt rating? Included in your description must be a definition of sovereign risk and a list of the determining factors that affect sovereign risk. Sovereign risk refers to the potential investment risk incurred

More about Credit Rating Agencies

Open Document