Credit Rating Agencies and Their Role In the 2007-­2008 Global Financial Crisis

Over the last one hundred years, credit rating agencies, (CRAs), played a key role in the growth of the international financial bond markets. In the run up to the 2007-­‐2008 Global Financial Crisis, (GFC), CRAs failed to appreciate properly the risks inherent in more complicated financial instruments (especially structured financial products backed by risky subprime mortgages), issuing incorrect ratings that later on, proved to be disastrous to the financial system. The current crisis has not just clearly demonstrated weaknesses in the methodology and governance of CRAs and proved the need for their reform. It has also revealed serious weaknesses in the existing regulatory framework regarding CRAs in the USA as well as in the EU and in the rest of the world.

This report focuses on the big three credit rating agencies – Moody’s, Standard & Poor’s and Fitch, which by far, dominate the credit rating industry. It defines the CRAs’ role and place within the international financial system with respect to public and private debt. Their role in the 2007-­‐2008 Global Financial Crisis is examined and various proposals are being made to address the CRAs’ weaknesses, failures and shortcomings. Read the short article here and the full article here, by Marwan Elkhoury.

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