The literature on rating antipathies that one of the role of rating agencies is "the ratification role of the agencies' (see MIFF (2010)). Explain what you understand by this certification role of Crass. The certification role of the credit rating agencies as mention in the 2010 MIFF report states that Credit Rating Agencies have evolved into a certification role, meaning that companies rely on being given a rating to certify their legitimacy and also to adhere to the broad regulations for public listing and debt issuance and capital requirements.The market impact of credit ratings is exacerbated by their overbalance in legislation, regulation and private sector interacts.
Ratings are often embedded in regulatory capital requirements and thresholds, and in triggers in various financial contracts. For example, prudential regulations typically allow for less capital or reserves to be held against highly rated, fixed-income instruments. Because the need for a credit rating has become so standardized in today's market, Credit Agencies stand as certification bodies, rather than exist as third party independent assessors of credit risk.It is this confusion that has caused many of the problems that Credit Ratings Agencies have been accused of reading or perpetuating. This fact was clearly stated by the CEO of Standard and Poor, who attempted to retrospectively crystallize Scar's purpose post SGF in a recent talk.
(REF). It is unclear whether Scar's apparent certification role was a product of years AT Atlanta retort Ana continued deregulation as a wangle, or winter c outwardly offered themselves as a certification body, hence forth perpetuated by the market; it may be likely that the truth sits somewhere in between these two extremes. 2.Despite the critics, why are CRASS (particularly, Moody's Investors Service and Standard ; Poor's) so entrenched in financial markets? -Ting * Historic reasons: They have established a long few years.
* Improve market efficiency * Globalization: global rating, MRS. should require them provide the global sector ratings. * Investors' perception: institutional and retail investors. * Regulation: Provide a benchmark and reference point for the market(e. G. Interest rate) * Removes some of the burden for retail/institutional investors and market, information asymmetry.
This is because they are embedded in the way markets operate.For example, some investors are only allowed to buy investment-grade securities. It meaner they have to sell securities if they become Junked. Meanwhile, the rockiness of banks balance sheet and how much capital it needs to set aside are determined by the ratings. Ratings are also common in deciding how big a haircut is required when banks and investors pledge collateral.
One saving grace in the Euro zone crisis is that the European Central Bank has stopped saying that only the highest rated sovereign debt can be pledged as collateral. But rating is still far too entrenched.In the case the use of ratings in rules was not to be reduced, rating agencies demanded that also other measures and benchmarks could be used to complement ratings. If ratings are removed from securities regulations, investors' protections will be removed that is argued by institutional investors and pension funds.
Even if ratings sometimes are imperfect-protect investors through a uniform, minimum credit quality for all money market funds. Removing that investor protection is akin to outlawing seat belts with hope that drivers will be less likely to be injured if a defecting belt fails in crash.Also, the Security Industry and Financial Markets Association has acknowledged that while the use of credit ratings in regulation may led to investors more reliance on ratings, it also provides "an appropriate minimum" and "an important data point that should be part of larger analysis".
