{"id":31282,"date":"2018-10-27T12:58:34","date_gmt":"2018-10-27T07:28:34","guid":{"rendered":"https:\/\/blog.forumias.com\/?p=31282"},"modified":"2018-10-27T12:58:34","modified_gmt":"2018-10-27T07:28:34","slug":"the-ratings-illusion","status":"publish","type":"post","link":"https:\/\/forumias.com\/blog\/the-ratings-illusion\/","title":{"rendered":"The ratings illusion"},"content":{"rendered":"<p><a href=\"http:\/\/www.thehindu.com\/opinion\/op-ed\/the-ratings-illusion\/article22755006.ece\"><b>The ratings illusion<\/b><\/a><\/p>\n<p><b>Context:<\/b><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Modern day credit rating agencies were first established after the financial crisis of 1837 in the U.S.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Such agencies were then needed to rate the ability of a merchant to pay his debts, consolidating such data in ledgers; soon enough, such ratings were being applied to equity stocks.<\/span><\/li>\n<\/ul>\n<p><b>Background:<\/b><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">By the 1920s, the big three of the ratings world (including <\/span><b>Fitch, Standard &amp; Poor\u2019s<\/b><span style=\"font-weight: 400;\">) had been incorporated.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">The passage of the <\/span><b>Glass-Steagall Act in 1933<\/b><span style=\"font-weight: 400;\"> helped formulate the separation of the securities business from banking.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Soon enough, by the <\/span><b>1960s,<\/b><span style=\"font-weight: 400;\"> such ratings had spread <\/span><b>over to commercial paper and bank deposits, along with expansion into rating the global bond market (including sovereign bonds).<\/b><\/li>\n<\/ul>\n<p><b>Loopholes in credit ranking agency:<\/b><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Despite vital role in the global financial world, rating agencies fail to <\/span><b>inspire confidence, with allegations of improper and inaccurate ratings<\/b><span style=\"font-weight: 400;\"> occurring frequently.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">The National Commission on the Causes of Financial and Economic Crisis in the United States (2011) held the failure of rating agencies to be <\/span><b>essential mechanism in the wheels of financial destruction.<\/b><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Moody\u2019s has been fined across various geographies for <\/span><b>non-adherence to standard rating protocols.<\/b><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Such rating agencies can have a <\/span><b>global impact, affecting the fiscal fortunes of nations,<\/b><span style=\"font-weight: 400;\"> due to flight of capital.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Nations perhaps <\/span><b>give too much importance to the achievement on such ratings, despite their structural flaws.<\/b><\/li>\n<\/ul>\n<p><b>Way ahead:<\/b><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">India must <\/span><b>utilise indigenous rating agncies<\/b><span style=\"font-weight: 400;\">, to help clean house in corporate sector.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">To safeguard investors, <\/span><b>SEBI can explore reforms<\/b><span style=\"font-weight: 400;\"> so that credit rating agencies do not provide non-rating advisory services to their clients, even at the cost of reduced profits.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">A <\/span><b>fixed operating fee model<\/b><span style=\"font-weight: 400;\"> may also be explored, thereby eliminating incentives to be the <\/span><b>\u201clowest-bidder\u201d<\/b><span style=\"font-weight: 400;\"> with compromised quality.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Outstanding ratings and sudden downgrades need to be <\/span><b>subjected to greater supervision.<\/b><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Akin to auditors, corporates should be <\/span><b>pushed to change rating agencies<\/b><span style=\"font-weight: 400;\"> on a regular basis.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">The \u201cissuer-pays\u201d model needs to <\/span><b>change to an \u201cinvestor-pays\u201d<\/b><span style=\"font-weight: 400;\"> model, with fees being standardised by the market regulator.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">At the governmental level, our fiscal decisions should be <\/span><b>marked by a push towards developing an economy with full employment and innovation,<\/b><span style=\"font-weight: 400;\"> instead of seeking to chase down ratings quarter by quarter.<\/span><\/li>\n<\/ul>\n","protected":false},"excerpt":{"rendered":"<p>The ratings illusion Context: Modern day credit rating agencies were first established after the financial crisis of 1837 in the U.S. Such agencies were then needed to rate the ability of a merchant to pay his debts, consolidating such data in ledgers; soon enough, such ratings were being applied to equity stocks. Background: By the&hellip; <a class=\"more-link\" href=\"https:\/\/forumias.com\/blog\/the-ratings-illusion\/\">Continue reading <span class=\"screen-reader-text\">The ratings illusion<\/span><\/a><\/p>\n","protected":false},"author":61,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"footnotes":""},"categories":[555],"tags":[],"class_list":["post-31282","post","type-post","status-publish","format-standard","hentry","category-test-1","entry"],"jetpack_featured_media_url":"","views":{"total":0,"cached_at":"","cached_date":1704797022},"jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/31282","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/users\/61"}],"replies":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/comments?post=31282"}],"version-history":[{"count":0,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/31282\/revisions"}],"wp:attachment":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/media?parent=31282"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/categories?post=31282"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/tags?post=31282"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}