Credit Rating Agencies Role in Financial Crisis
1. Credit rating agencies present one of the key problems in reconfiguring the global financial architecture. Why? What are the options? What is the most likely solution? * The rating agencies present one of the key problems because they were behind the rating of the complex CDOs as well as taking an active part in creating these mortgage-related products which created conflict of interest. The ratings given to the CDO tranches did not effectively disclose the true credit quality of the underlying securities which contained a much higher default probabilities.
* Options: * More regulations by SEC to control the “issuer pays” model. * “To correct the competition problem within the “issuer pays” model, the SEC could place limits on the competition that occurs among the rating agencies.” (Acharya & Richardson, 2009) * “An alternative structure (…) would be for the SEC to create a department that houses a centralized clearing platform for rating agencies.” (Acharya & Richardson, 2009) * Another option is to deregulate the industry and allow free-market competition forces to shape its further growth and development which could bring in players like Bloomberg that would offer bond rating as a value-added services to its clientele. * Most likely solution: * Although it is a very complex situation and it would require a series of regulatory changes, a regulatory oversight agency that would closely monitor the rating agencies and act as an intermediary in matching the issuers with the rating agencies.
2. Greece is in trouble. Why? Fast-forward 5 years and describe the most likely outcome of the current problems and their consequences for global banking and financial markets. * Greece is in trouble because it has failed to keep under controls its ballooning debt and accumulated a total national debt of over 113% of the country’s GDP. In April and May of this year Greece has to repay a total of $23 billion of its
* Options: * More regulations by SEC to control the “issuer pays” model. * “To correct the competition problem within the “issuer pays” model, the SEC could place limits on the competition that occurs among the rating agencies.” (Acharya & Richardson, 2009) * “An alternative structure (…) would be for the SEC to create a department that houses a centralized clearing platform for rating agencies.” (Acharya & Richardson, 2009) * Another option is to deregulate the industry and allow free-market competition forces to shape its further growth and development which could bring in players like Bloomberg that would offer bond rating as a value-added services to its clientele. * Most likely solution: * Although it is a very complex situation and it would require a series of regulatory changes, a regulatory oversight agency that would closely monitor the rating agencies and act as an intermediary in matching the issuers with the rating agencies.
2. Greece is in trouble. Why? Fast-forward 5 years and describe the most likely outcome of the current problems and their consequences for global banking and financial markets. * Greece is in trouble because it has failed to keep under controls its ballooning debt and accumulated a total national debt of over 113% of the country’s GDP. In April and May of this year Greece has to repay a total of $23 billion of its
References: Viral Acharya, Matthew Richardson. “Restoring Financial Stability: How to Repair a Failed system.” New Jersey: John Wiley & Sons, Inc., 2009 Tony Spadaccia. “U.S. is Resembling Greece’s Economic Decline.” The Breeze, March 18, 2010 The European Institute, February 2010. Web. Fri. 12 March, 2010 Conditions.” The European Institute, March 2010. Web. Fri. 12 March, 2010 Arthur E International Monetary Fund. May, 2002. Web. 15 March, 2010