Credit Rating Agencies: Assassins or Assessors?
Credit Rating Agencies.
In other words, modern world’s financial assessors. S&P, Moody’s and Fitch. The biggest three players in the market.
What they simply do is; to rate payback ability of an economy or an asset. And they use letters to define rates. From AAA to D, there are too many grades show the risk for lending or investing in.
No one can argue that the grades given by those three are the main determinant of the capital flow. For example, If the rate of a country increases, the capital starts to inflow to the economy or vice versa.
Question is; Do they measure the strength of an economy or decide which economy is going to get strong?
The past 30 years shows us the reputation of credit rating agencies have been decreasing. It has been doubtful that the bankrupt enterprises were high graded just before their collapse. Enron scandal (2001), Dot Com bubble (2002), Lehman Brothers (2008) and so on and so forth.
Similarly, CRA's inability to predict country crises brought various discussions on the reliability of the ratings too. Mexican Peso Crisis (1994), Asian Financial Crisis (1997), USA Mortgage Crisis (2007) and European Debt Crisis (2009-2013) are the majör ones.
The two main reasons put the CRAs in a suspicious position; First; Non-transparent structure of credit rating processes. Second; They are not responsible for the rates they have announced, which means they do not face any sanctions for their decisions.
After Mortgage crisis some regulations were placed in the market. The biggest three received penalties to pay for the reason they inflated their ratings. But they still continue to rate inconsistently. Considering billion scale capital structure, the penalties are not disincentive, plus reasonable for them to pay off.
Of course CRA’s are the key institutions in terms of capital safety. But their reputations and reliablities received too much damage, fake reports, deceptive ratings, court decisions and etc.
No matter what, there should be someone to assess risks in the financial system inevitably. Someone clean, someone clear and someone fair.