The Role (if any) of Rating Agencies after the Crisis

This article presents panel session highlights from the 2010 FMA annual meeting. This panel focused on the positive role which the rating agencies can play in the post-crisis world. Many users of ratings implicitly assume that rating changes are smooth. In fact, the data show that such smooth changes are more likely to occur with industrial firms where deterioration in economic fundamentals occurs relatively slowly. It has been argued that the rating agencies face a fundamental conflict of interest because they receive compensation from issuers and face a human tendency to bias their ratings towards those who are paying them. The panel noted that this argument is simplistic because it neglects both the highly labor intensive aspect of ratings analysis and the reputation of the ratings agency.