banking service chronicle This article was published in the month of November Fitch - BBB- with stable outlook. 27 Accountability o There is no mechanism to protect investors and/or borrowers from mistakes made by CRAs or any abuse of power on their part. o Also they follow an issuer pay model where the rating agencys principal revenue stream is received from the issuers whose products they rate. Governance issues and conflicts in sovereign ratings – o Major CRAs are US-head-quartered largely funded by the institutions they rate. And the ratings business is extraordinarily profitable. o There is therefore an asymmetry of incentives and disincentives as regards willingness of CRAs to downgrade advanced economies versus emerging and developing economies whose regulators have far less influence on CRAs decisions. Barriers to entry and lack of competition as market is dominated by only a few CRAs. Way Forward Refocus regulatory scrutiny o Regulators need to focus more on the form of the ratings process than on the substance of decisions to check the conflict of interest. o A global super-regulator of CRAs would be best placed to address such issues. Reducing dependency on credit ratings in regulation o Studies on how rating agencies respond to a crisis conclude that rating agencies do not quite see through a crisis. Rating agencies moreover react stronger when the crisis is deeper and exceeds a minimum threshold banking service chronicle magazine subscription.
