Question

Credit rating agencies (CRAS) issue ratings on bonds and loans that indicate the risk of default. But CRAs are paid to issue those ratings by the companies issuing bonds into the market. This creates a conflict of interest - the CRAs are paid by the firms that they publish opinions on. In principle, CRAs could accept higher fees in return for publishing better ratings. What would be your main counter argument against this conflict of interest? Credit rating agencies main conflict of interest is represented by the fact that they have to evaluate the risk of financial instruments issued by the firm that pays them to do so. Rating agencies base their reputation on the trustworthiness of their evaluation, therefore it is in their best interest to faithfully assess the risk even if they are paid to do so. Conversely, prior to the 2007 crash, it has happened that CRA did get influenced by market dynamics and competed for the instruments rating by giving it triple A, even if this was not the appropriate rating. After the crash, the damage to the reputation drastically influenced their behavior. Therefore, now it is much more likely that their ratings are not only assessed in good faith and based on the actual market information, rather than

          Credit rating agencies (CRAS) issue ratings on bonds and loans that
indicate the risk of default. But CRAs are paid to issue those ratings by
the companies issuing bonds into the market. This creates a conflict of
interest - the CRAs are paid by the firms that they publish opinions on.
In principle, CRAs could accept higher fees in return for publishing
better ratings.
What would be your main counter argument against this conflict of
interest?
Credit rating agencies main conflict of interest is represented by
the fact that they have to evaluate the risk of financial instruments
issued by the firm that pays them to do so. Rating agencies base
their reputation on the trustworthiness of their evaluation,
therefore it is in their best interest to faithfully assess the risk even
if they are paid to do so. Conversely, prior to the 2007 crash, it has
happened that CRA did get influenced by market dynamics and
competed for the instruments rating by giving it triple A, even if
this was not the appropriate rating. After the crash, the damage to
the reputation drastically influenced their behavior. Therefore, now
it is much more likely that their ratings are not only assessed in
good faith and based on the actual market information, rather than

Credit rating agencies (CRAS) issue ratings on bonds and loans that
indicate the risk of default. But CRAs are paid to issue those ratings by
the companies issuing bonds into the market. This creates a conflict of
interest - the CRAs are paid by the firms that they publish opinions on.
In principle, CRAs could accept higher fees in return for publishing
better ratings.
What would be your main counter argument against this conflict of
interest?
Credit rating agencies main conflict of interest is represented by
the fact that they have to evaluate the risk of financial instruments
issued by the firm that pays them to do so. Rating agencies base
their reputation on the trustworthiness of their evaluation,
therefore it is in their best interest to faithfully assess the risk even
if they are paid to do so. Conversely, prior to the 2007 crash, it has
happened that CRA did get influenced by market dynamics and
competed for the instruments rating by giving it triple A, even if
this was not the appropriate rating. After the crash, the damage to
the reputation drastically influenced their behavior. Therefore, now
it is much more likely that their ratings are not only assessed in
good faith and based on the actual market information, rather than

Added by Elisa R.

Question

Please give Ace some feedback