Since the financial crisis in 2008, rating agencies are in the spotlight. Often they were blamed by politicians and economists for causing the crisis, because they rated some financial products with an excellent grade, without exactly knowing what was really behind these products. To understand why and how Credit Rating Agencies like Standard & Poors, Fitch and Moody's rate, we have to look closer at the CRA and their rating in order to understand how they work. In this research paper I will take a critical look at these institutions. I will talk about the independence of these global oriented enterprises and I will analyze their impact on the financial market and the politics in order to demonstrate why they are so powerful like quoted above.
Table of Contents
1. Introduction
1.1 What are Credit Rating Agencies ?
2. Raison d'être
3. Conflicts
3.1 Methodology
3.2 Conflict of Interest
3.3 Profit Maximization
3.4 Oligopoly market
3.5 Economic Relevance of a Downgrade
4. Role of credit Rating Agencies in politics and the financial market
4.1 Regulatory Power
4.2 Influence on political sciences
5. Conclusion
6. Works cited
Research Objectives and Core Themes
This paper examines the influence, independence, and operational mechanisms of global credit rating agencies, exploring their critical role within the financial market and their impact on political decision-making processes following the 2008 financial crisis.
- The operational methodology and inherent conflicts of interest within rating agencies.
- The oligopolistic market structure of the credit rating industry.
- The regulatory power of agencies and their influence on investment behavior.
- The political implications and potential for economic convergence toward Anglo-Saxon models.
Excerpt from the Book
3.1 Methodology
There are three great critics about the methodology of the agencies. The first one is that they evaluate and rate in a pro cyclical manner14. This means during economic boom times they tend to evaluate better and during a recession they downgrade firms. Of course the agencies know this problem and try to evaluate in long-term outlook. This pro cyclical behavior can lead to the fact that it accelerates recessions and causes herding behavior by the other market actors. That means if during recession Fitch for example lowers the rating of a firm, because they are not doing well, some investors may see this as an signal and jump out, that causes that capital is taken away from the market and the recession speeds up.
Second the rating agencies are blamed that they rate after Anglo-Saxon based views.15 Anglo-Saxon views means that they prefer fiscal short-term orientation. The danger in this situation is that states and corporations try be liked by the credit rating agencies and change their behavior. In the long run this could lead to a convergence towards an Anglo-Saxon economic system.
The third critic point about the methodology of credit ratings is that the rating criteria do not include the political risk in some states.16 That means that some political instable countries can still have an excellent rating, even if its predictable that the country will collapse in a few month. Do you think that investors can than rely on the rating published by the agencies? probably not, because it is too risky in some cases. But this also means that it is easy for unstable countries to finance themselves, because good rating equals low risk premium for treasury bonds. That means that sometimes dictatorship governments easy get access to money. To defense of the Rating Agencies we need to note, that there is an extra country rating, which rates a country's political and economic stability.
Summary of Chapters
1. Introduction: Outlines the scope of the paper, focusing on the power of rating agencies and the research sources used.
2. Raison d'être: Explains the necessity of rating agencies in resolving information asymmetry and providing market transparency.
3. Conflicts: Analyzes the structural and methodological criticisms, including pro-cyclical behavior, conflicts of interest, and profit motives.
4. Role of credit Rating Agencies in politics and the financial market: Discusses the regulatory power of agencies and their indirect influence on political decision-making.
5. Conclusion: Summarizes the findings, noting that while agencies are essential for modern markets, their unchecked power remains a subject of debate.
6. Works cited: Lists the academic literature and reports referenced in the analysis.
Keywords
Credit Rating Agencies, Financial Crisis, Information Asymmetry, Oligopoly, Rating Methodology, Conflict of Interest, Sovereign Ceiling, Regulatory Power, Financial Markets, Economic Stability, Investment Grade, Anglo-Saxon Model, Pro-cyclicality, Corporate Rating, Default Risk.
Frequently Asked Questions
What is the core subject of this research paper?
The paper investigates the functioning, influence, and perceived independence of credit rating agencies within the global financial system.
What are the primary themes discussed?
Central themes include the oligopolistic nature of the rating industry, the conflict of interest inherent in the issuer-pay model, and the power agencies hold over both corporate entities and sovereign states.
What is the main research question or goal?
The goal is to analyze whether credit rating agencies act independently and how their assessments influence financial markets and political behavior.
Which scientific approach is utilized?
The author uses a qualitative approach, basing the analysis on existing literature, academic books, and essays concerning financial regulation and economic influence.
What topics are covered in the main section?
The main section covers the history of rating agencies, their methodological flaws (such as pro-cyclicality), the impact of the oligopoly, and their regulatory influence.
What are the most relevant keywords?
Key terms include Credit Rating Agencies, Information Asymmetry, Oligopoly, Conflict of Interest, and Regulatory Power.
How do unsolicited ratings create a conflict of interest?
The paper suggests that unsolicited ratings may be used as leverage to encourage firms to purchase rating services, potentially leading to lower-quality analysis for non-paying firms.
What is the "sovereign ceiling" concept?
It is an unwritten rule where rating agencies generally do not rate a company within a country higher than the sovereign rating of that country itself.
- Citar trabajo
- Jochen Schweizer (Autor), 2011, The independence of rating agencies, Múnich, GRIN Verlag, https://www.grin.com/document/283241
