TAILIEUCHUNG - THE CREDIT RATING INDUSTRY - RICHARD CANTOR AND FRANK PACKER

Several European cases highlight to varying degrees the roles of direct and indirect crossborder credit in the course of the global credit boom of the 2000s (Graph 1). Direct crossborder credit to non-banks in Ireland (dark shaded area), for example, grew at roughly 40% year on year in the three years prior to the crisis (centre panel), 10 percentage points above the rate for domestic bank credit. Moreover, banks in Ireland drew on indirect cross-border credit (left-hand panel, dashed brown line) to support their domestic lending. Combined, these two cross-border components accounted for more than half of the stock of total bank credit to non-banks in the. | The Credit Rating Industry Richard Cantor and Frank Packer As financial market complexity and borrower diversity have grown over time investors and regulators have increased their reliance on the opinions of the credit rating agencies. At the same time the number of rating agencies operating in the United States and abroad has risen sharply. Together these trends have prompted market participants and policymakers to reassess the performance of the agencies and the adequacy of public oversight of the ratings industry This article provides background for such a reassessment by investigating the evolution and economics of the industry the growth of ratings-dependent regulations and the reliability and comparability of the agencies ratings We examine the correspondence of ratings with default rates and report differences among major agencies in their ratings for junk bonds international banks and mortgage-backed securities Our findings raise several questions about the current uses of ratings While the agencies provide accurate rank-orderings of default risk the meanings of specific ratings vary over time and across agencies Since these ratings are used as the basis of most investor guidelines and government regulations the variations in meaning could have serious implications Moreover as the number of agencies increases differences in ratings may encourage borrowers to shop for the most favorable ratings. In light of the possibilities for ratings misuse the current reevaluation of ratings-dependent regulations and the adequacy of public oversight seems well justified. The Evolution and Economics of the Ratings Industry Rating Agency Origins Owners and Symbols The precursors of bond rating agencies were the mercantile credit agencies which rated merchants ability to pay their financial obligations In 1841 in the wake of the financial crisis of 1837 Louis Tappan established the first mercantile credit agency in New York Robert Dun subsequently acquired the agency and .

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