Credit Rating Governance

Global Credit Gatekeepers

Ahmed Naciri

• Publisher: Routledge
• Year: 2015
• Print ISBN: 9781138796546
• eBook ISBN: 9781317634355
• Topic: Business
• Subtopic: Business General
• Index: Business

Credit rating agencies play an essential role in the modern financial system and are relied on by creditors and investors on the market. In the recent financial crisis, their power and reliability were often questioned, yet a simple rating downgrade could threaten to bankrupt a whole country.

This book examines the governance of credit rating agencies, as expressed by their ability to fairly, ethically and consistently assign higher rates to issuers having lesser default risks. However, factors such as the drive for increased revenue and market share, the inadequate business model, the inadequate methodology of assessing risk, opacity and inadequate internal monitoring have all been identified as critical governance failures for credit agencies. This book explores these issues, and proposes some potential solutions and improvements.

This will be of interest to researchers and advanced students of corporate finance, finance, financial economics, risk management, investment management, and banking.

Almost unnoticed before the 2007 subprime crisis, credit rating agencies have since become the focus of much attention: who are they? How do they operate? Should we regulate them? … and so on. Ahmed Naciri provides answers. His book explains their activities and how they discretely shape the world capital markets. This book is a must for anyone involved with finance.

Julien Bilodeau, Professor, Université de Sherbrooke, Canada

A solid and timely contribution to a fundamental issue within corporate and global finance. Features in depth analysis of the industry in terms of scope, structure, contribution, cross country performance, weaknesses and, finally, dark sides. It also provides viable future scenarios and possible approaches for reform. A must read for all involved in international business and finance.

M.S.S. el Namaki, Dean, Victoria University, Switzerland

Credit Rating Governance

Credit rating agencies play an essential role in the modern financial system and are relied on by creditors and investors on the market. In the recent financial crisis, their power and reliability were often questioned, yet a simple rating downgrade could threaten to bankrupt a whole country.

This book examines the governance of credit rating agencies, as expressed by their ability to fairly, ethically and consistently assign higher rates to issuers having lesser default risks. However, factors such as the drive for increased revenue and market share, the inadequate business model, the inadequate methodology of assessing risk, opacity and inadequate internal monitoring have all been identified as critical governance failures for credit agencies. This book explores these issues, and proposes some potential solutions and improvements.

This book will be of interest to researchers and advanced students of corporate finance, finance, financial economics, risk management, investment management and banking.

Ahmed Naciri is Professor at the School of Business at UQAM, Canada. His work has earned him the Award of Excellence from the Canadian Association of Administrative Sciences.

Routledge studies in corporate governance

1. Corporate Governance Around the World
   Ahmed Naciri
2. Behaviour and Rationality in Corporate Governance
   Oliver Marnet
3. The Value Creating Board
   Corporate governance and organizational behaviour
   Edited by Morten Huse
4. Corporate Governance and Resource Security in China
   The transformation of China’s global resources companies
   Xinting Jia and Roman Tomasic
5. Internal and External Aspects of Corporate Governance
   Ahmed Naciri
6. Green Business, Green Values, and Sustainability
   Edited by Christos N. Pitelis, Jack Keenan and Vicky Pryce
7. Credit Rating Governance
   Global credit gatekeepers
   Ahmed Naciri

Credit Rating Governance

Global credit gatekeepers

Ahmed Naciri

First published 2015

by Routledge

2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN

and by Routledge

605 Third Avenue, New York, NY 10017

Routledge is an imprint of the Taylor & Francis Group, an informa business

© 2015 Ahmed Naciri

The right of Ahmed Naciri to be identified as author of this work has been asserted by him in accordance with sections 77 and 78 of the Copyright, Designs and Patents Act 1988.

All rights reserved. No part of this book may be reprinted or reproduced or utilized in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers.

Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe.

British Library Cataloguing in Publication Data

A catalogue record for this book is available from the British Library

Library of Congress Cataloging in Publication Data

Naciri, Ahmed

Credit rating governance: global credit gatekeepers / Ahmed Naciri. – 1 Edition.

pages cm. – (Routledge studies in corporate governance)

Includes bibliographical references and index.

1. Rating agencies (Finance) 2. Credit ratings. 3. Financial services industry. I. Title.

HG3751.5.N33 2015

332.1′78–dc23

2014029703

ISBN: 978-1-138-79654-6 (hbk)

ISBN: 978-1-315-75783-4 (ebk)

DOI: 10.4324/9781315757834

Typeset in Sabon

by Wearset Ltd, Boldon, Tyne and Wear

This book is dedicated to all those who, because of others’ greed, have lost life savings or retirement plans, in transactions in which they had no understanding or saying.

With business margins exceeding 40 per cent and secured by a quasi-legal oligopoly, credit rating agencies were granted so great power of wealth creation that had never been granted before and that only central banks can challenge.

Ahmed Naciri

Contents

• List of figures
• List of tables
• List of appendices
• Preface
• List of abbreviations
• 1 Introduction to the world of credit rating
• 2 Credit rating agencies: who they are and what they do
• 3 The Big 3: the global credit market gatekeepers
• 4 Credit rating agencies’ methodologies, metrics and rating accuracy
• 5 Ordinal credit ratings: the threat to rating accuracy
• 6 Credit ratings critics: telling it like it is
• 7 Credit rating agencies: external monitoring
• 8 Credit rating agencies: internal monitoring
• 9 Agencies’ rating quality control systems
• 10 The Cha6: shall they present a serious challenge to the Big 3?
• 11 Critical perspective...

Table of contents

• Cover Page
• Frontmatter 1
• Half Title Page
• Frontmatter 2
• Title Page
• Copyright Page
• Dedication
• Epigraph
• Table of Contents
• List of figures
• List of tables
• List of appendices
• Preface
• List of abbreviations
• 1 Introduction to the world of credit rating
• 2 Credit rating agencies: who they are and what they do
• 3 The Big 3: the global credit market gatekeepers
• 4 Credit rating agencies’ methodologies, metrics and rating accuracy
• 5 Ordinal credit ratings: the threat to rating accuracy
• 6 Credit ratings critics: telling it like it is
• 7 Credit rating agencies: external monitoring
• 8 Credit rating agencies: internal monitoring
• 9 Agencies’ rating quality control systems
• 10 The Cha6: shall they present a serious challenge to the Big 3?
• 11 Critical perspective and concluding remarks
• Index