Credit Rating Agencies (CRAs) such as Standard & Poor’s and Moody’s have existed since the beginning of the 20th century. Their main objective is to increase the efficiency of the financial markets by producing ratings expressing the creditworthiness of companies with respect to loans and credits. The intermediary position of CRAs places high demands on the efficiency of the rating process and the avoidance of conflicts of interest. In practice there is some doubt as to the realism of these objectives and hence the usefulness of ratings even though, paradoxically, they do enjoy broad acceptance. This article discusses the question of whether the criticism that investors and companies have of CRAs is always justified and what action should be taken when that criticism is justified. Reference is made to the objectives of CRAs and the doubts about their efficiency and effectiveness that have arisen in many national and international publications. This article provides an insight into how CRAs operate and how this is judged within society. CRAs have an information transformation function and the existence of dual information asymmetry might have an negative impact on this. Holding CRAs liable is one of the possible solutions. Legal measures such as breach of contract and negligence, may offer CRAs incentives to make every reasonable effort to prepare adequate credit ratings and to update ratings in a timely manner. It is nonetheless difficult (in the context of liability) to make an objective assessment because CRAs, too, must work under uncertain relationships. Read the original and complete article.

By Piet Duffhues and Wim Weterings