Views on improving the integrity of global capital markets
08 December 2011

Credit Rating Agencies and Their Credibility Problem

When the dust cleared after the worldwide financial crisis, credit rating agencies (CRAs) emerged in some quarters as Public Enemy No. 1 for masking the risk of mortgage-related securities leading up to meltdown. Although we’re concerned that selective amnesia over the financial crisis — and its chief culprits — has settled in, credit rating agencies aren’t getting off the hook so easily. 

A recent survey of CFA charterholders in Canada conducted by the Globe and Mail and CFA Institute found that 71 percent of respondents say the major credit rating agencies — Moody’s Investors Service, Standard & Poor’s, Fitch Ratings, and DBRS — contributed to the global crisis. And when asked about the credibility of debt ratings provided by CRAs, only 2 percent rated them “very credible.”   

Survey takers were asked to assess solutions for creating a better system for CRA performance and accountability, and here’s how they responded:

  • 85 percent said CRAs should disclose their process for evaluation and details about each individual rating
  • 70 percent supported the creation of an oversight body or SRO for the industry
  • 58 percent said CRAs should be paid by investors for their ratings (rather than relying on the issuer-paid model that currently dominates the industry)
  • 57 percent said the industry should launch a task force to investigate the system
  • 50 percent said CRAs should be defendants in class action lawsuits 

Survey respondents were divided on the issue of removing rules and laws requiring credit ratings: 39 percent were opposed compared with 37 percent supporting such a move. 

For their part, regulators on both side of the Atlantic are rethinking regulation of CRAs in response to the crisis and its continuing fallout on the financial markets. Canadian securities regulators have published for comment a proposal that would introduce securities regulatory oversight of credit rating agencies. The European Union has centralized oversight of credit rating agencies and is mulling over additional reforms, including enhanced competition in an industry dominated by the “big three” (S&P, Moody’s, and Fitch). Meanwhile, the U.S. Dodd–Frank Act contains numerous provisions aimed at improving the oversight and accountability of credit rating agencies, with the SEC leading the charge to wean the industry off its dependence on ratings. 

For the time being, the rating agencies are as powerful as ever (look no farther than the U.S debt downgrade and the European sovereign debt ratings for proof of their continuing influence). But now that CRAs have found themselves in the crosshairs of regulators, amid waning investor confidence, they could soon see the end of business as usual.

About the Author(s)
Crystal Detamore

Crystal Detamore is a communications director at CFA Institute and a former columnist for Entrepreneur magazine.

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