Summary of Credit rating agency reform is incomplete

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Credit rating agency reform is incomplete summary
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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. 

In this summary, you will learn

  • Why the credit rating system is inherently flawed and fraught with conflicts of interest,
  • How inflated credit ratings on debt securities helped spark the housing bubble and 2008 financial crisis, and
  • What reforms are necessary to help make the credit rating system more credible and independent. 
 

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. 

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