Competition Among Credit Rating Agencies

Open Access
Author:
Browne, Brandon
Area of Honors:
Finance
Degree:
Bachelor of Science
Document Type:
Thesis
Thesis Supervisors:
  • Gary Gray, Thesis Supervisor
  • James Alan Miles, Honors Advisor
Keywords:
  • credit ratings
  • credit rating industry
Abstract:
The purpose of this paper is to analyze the credit rating industry, while providing specific emphasis on competition and inherent conflicts of interest that exist within the industry. The first section of the paper defines credit ratings and describes key elements of the ratings process. This is followed by a discussion of the history of the credit rating industry, highlighted by the origins of the three major firms: Standard and Poor’s, Moody’s Investors Service and Fitch Ratings. The creation of the Nationally Recognized Statistical Rating Organization (NRSRO) designation is a significant event in the history of the credit markets and the topic is introduced as a separate section from the industry history. The Credit Rating Agency Reform Act of 2006 describes recent changes to the NRSRO designation status, and other regulatory changes to the industry. The current industry environment section speaks mainly about changes in industry since the 1970s that have created the modern credit rating system in place, as well as information related to the three prominent firms in the industry. The two possible substitutes to credit ratings, bond insurance and credit spreads, are discussed after the industry environment. This is followed by an analysis of the conflicts of interest that are inherent in the credit rating process and current business model, mainly the disconnect between investor and issuer demands. This is followed by a section describing the dual ratings norm. The final sections draws conclusions based on information presented in previous sections and examines the industry’s future.