The Key Role Of The Commercial Rating Agencies

In business, market structure plays an important role, which helps to shape the competitive landscape for businesses at all levels. Each business industry will naturally form a market structure that comes in numerous forms: Perfect competition, monopolistic competition, oligopoly, or monopoly. Verizon Wireless is a well-known communications company and large enough to affect the market. Oligopoly is defined as a market in which only a few firms dominate, and judging from Verizon competition there are only a few firms involve: T-Mobile, AT&T and Sprint. With only few competitors involve the barrier to entry is high, but there still lies a large pool of customers. The barriers are high because of the amount of money that has to into the infrastructure

The world’s financial system was almost brought down in 2008 by the collapse of Lehman Brothers that was a major international investment bank at that time. The government sponsored these banks’ bailouts that were funded by tax money in order to restore the industry. Before the crisis, banks were lending irresponsible mortgages to subprime borrowers who had poor credit histories. These mortgages were purchased by banks and packaged into low-risk securities known as collateralized debt obligations (CDOs). CDOs were divided into tranches by its default risk. The ratings of those risks were determined by rating agencies such as Moody’s and Standard & Poor’s. However, those agencies were paid by banks and created an environment in which agencies were being generous to ratings since banks were their major clients.

The regulation that I have chosen for this paper is amendment in the Regulation X i.e. “Real Estate Settlement Procedures Act” and Regulation Z which is for “Truth in Lending”, for establishing the new disclosure requirements and forms in Regulation Z for the most closed-end consumer credit transactions secured by the real property. This regulation is controlled by the Bureau of Consumer Financial Protection. The role of the Consumer Financial Protection Bureau (CFPB) is to provide consumers information related to the terms of their agreements with financial companies during their application for a mortgage, choosing among credit cards, or using any number of other consumer financial products. The mortgage market is the single largest market for the consumer of financial products and the services in the United States, with approximately $10.4 trillion in loans outstanding. Since last decade, market went through an unprecedented cycle of the expansion and the contraction that was fuelled in the part by securitization of mortgages and the creation of increasingly sophisticated derivative products. This led to the collapse of financial system in 2008 and sparked the most severe recession in United States.

Moody’s did not necessarily commit any crime. However, their rating of mortgage-backed securities is what caused the interest of investors to decrease and the demand for more securities to increase.

Since the onset of the financial crisis 2008, the sovereign debt crisis in western economies and the new financial regulation with Basel III coming up, the financial industry faces the challenge of reinventing itself. The ring-fence for Commercial and Investment Banking, and new economic and regulatory capital requirements will determine the kinds of products banks will be able to distribute. It will have a huge impact in the Investment Banking business, which will suffer tough regulation and supervisory procedures. At the same time, credit risk models will be reviewed because they have failed to predict the crisis of 2008. The current financial and economic crisis doesn’t have any precedent in the past.

The oldest credit rating agency, Moody, was founded 108 years ago in 1909 by John Moody. This corporation was established when the popularity of corporate bonds grew. John Moody recognized that his investors needed trustworthy information about the issuer's’ creditworthiness. This corporation is composed of two business units, Moody’s investors service being one and Moody’s KMV, now it’s called Moody’s analytics being another. Moody’s investors service make profits by rating bonds. Moody’s analytics basically did the same job as Moody’s KMV. They both provided credit analysis tools and financial modeling and consulting. Additionally, they analyze the risk for the government and corporations. They also made money from charging fees from those

S&P as a rating agency has been improving and changing their methodology of how to revise financial institutions’ performance after the bankruptcy of Lehman Brothers Holdings Inc. and Bear Stearns Cos. After changing their criteria about financial institutions’ credit ratings, they announced the downgrade. S&P is a research company which evaluates stocks and bonds, and it earns revenue from subscribers and financial assets issuers. S&P’s main objective is to provide reliable creditworthiness research to the investors or subscribers, however issuers also have to pay an amount of money to them for doing research, therefore a conflict of interest might exist. Investors and regulators may worry about this credit-rating agency to bias their report, because they might upgrade the rating to attract more business. In this case the downgrade may also involve conflicts of interest, which made this credit assessment quality to decline and increase the asymmetric problem that affect the financial market.

The incumbent credit raters had received severe criticism following the collapse in creditworthiness and prices of mortgage-and asset-backed securities during the financial crisis in 2008 and 2009. The three large rating agencies were accused of facilitating a vast bubble in these securities by issuing overly

In the early-2000s, Moody’s, one of the leading credit rating agencies in the world, evaluated thousands of bonds backed by so-called “subprime” residential mortgages—home loans made to those with both low incomes and poor credit scores. When housing prices began to fall in 2006, the value of these bonds disintegrated, and Moody’s was compelled to downgrade them significantly. In late 2008, several commercial banks, investment banks, and mortgage lenders that had been

The financial services industry is an economic sector that provides different kinds of products of varying nature to customers and institutions. Some of the major players in this industry include banks, investment brokers, consumer and commercial lenders, stock exchanges, collection agencies, venture capital investors, asset managers, and investment brokerage firms. Generally, these financial institutions tend to be diverse to an extent that they fit into varying risk profiles. These financial firms offer products and services that

So it is also attractive for Jules Kroll to take this opportunity to enter the credit rating industry. In addition, the “issuer pays” model, which used by the big three rating agencies, lets companies shop around for the best ratings, putting pressure on the agencies to inflate their grades. As a result, it is very difficult to argue that they can adequately represent the users’ side. Therefore, Jules Kroll wants to use another model that can assign unbiased and reliable ratings.

• Credit underwriting: Evaluating underwriting practices on new or renewed loans for easing in structure and terms. Reviews will focus on new products, areas of highest growth, or portfolios that represent concentrations. Examiners will continue to assess banks’ efforts to mitigate risk for home equity lines of credit approaching end-of-draw

Lending evaluations by Santander are based on credit background of the person (or company) who wants borrow. Through the development of a credit-approval system, Santander Consumer Finance increased an understanding into these clients on an online database which allowed for the use of real time analysis in determining interest rates for the business interactions.

In the capital markets, lower bond ratings would result in a higher cost of debt, and actually may negatively impact the stock price, as investors might pay less for a riskier asset to generate a higher required return.

It should be noted, prior to the crisis, there was already an increasing concern of economists and critics about the credit quality that was provided by the financial sector at the time when there was low interest rates that were applied by the government. There were also issues about the inappropriateness or ineffectiveness of the standards that were used in extending credit by the financial sector (Calvo, 171).