Summary of Credit rating agency reform is incomplete

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Credit rating agency reform is incomplete summary
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Rating

8

Qualities

  • Analytical
  • Eye Opening
  • Overview

Recommendation

This brief but important article from economist Alice M. Rivlin and analyst John B. Soroushian presents a unique slant on the flaws in the current credit rating system for traded securities, a little-discussed but critical topic, given the credit rating agencies’ outsized role in contributing to the 2008 financial crisis. getAbstract recommends this timely reminder of a crucial issue still pending resolution to fixed-income analysts, credit risk managers, economists and financial professionals. 

About the Authors

Alice M. Rivlin is a senior fellow in economic studies and health care policy at the Brookings Institution. John B. Soroushian is a senior policy analyst at the Bipartisan Policy Center.

 

Summary

Although exaggerated credit ratings on mortgage debt securities played a big part in spawning the 2008 financial crisis, little work has since gone into shoring up credit rating agency (CRA) weaknesses or enhancing the independence and credibility of the rating process. The professional assessment of risk makes credit ratings essential for efficient financial markets, yet the ratings system remains highly flawed. 

Starting with the first credit rating agency in 1909, investors paid CRAs to rate securities. That changed in the 1970s, when issuers began footing the bill...


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