Credit Rating Agencies: How Watchful Are the Watchdogs?

Abstract

Credit rating agencies have gained immense importance in the financial markets worldwide but the important role played by the credit rating agencies have come under appraisal due to their failure in providing accurate and timely ratings in some cases in the past. Credit rating agencies' activities in the recent times revealed their faulty assessment and lax monitoring of securities, thus the questions on the credit rating methodologies in assessing the default risk and their relationship with the issuer have been raised when Enron went bankrupt and in the subprime crisis. So it's appropriate to learn the lessons of Enron, and now with recent meltdown in financial markets, to check whether these agencies have some sense of accountability, to ensure they perform their function as expected properly. It becomes important to assess their role, which is considered indispensable part of the financial system after these market failures. The most important concern today is to understand the reasons behind it and to provide solutions to make sure that the credit rating agencies use their authority to protect capital markets.