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Analysis on the Conflicts of Interest in the Credit Rating Agencies

Author: GongXue
Tutor: LiSuoYun
School: Shanxi University of Finance
Course: Finance
Keywords: Credit rating conflicts of interest regulatory policies
CLC: F832.4
Type: Master's thesis
Year: 2014
Downloads: 5
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Abstract


2007, by the U.S. subprime mortgage crisis caused a global financial crisis, in thiscrisis, exposed the U.S. and global financial problems, the most concern is: why themajor credit rating before giving high rating agencies and bond credit rating will plungeovernight and even the occurrence of default? Rating agencies play a role in the crisiscaused by people’s thinking. From the roots of speaking, the rating agencies greatlysolve the problem of asymmetric information in financial markets: they are third-partyperspective to the subject of finance to make the right credit rating for both sides toprovide a fair level of credit improve the efficiency of financial markets, reducing themoral hazard and adverse selection occurs.Currently, the world’s leading credit rating agencies Moody’s, Standard&Poor ’sand Fitch Ratings. Their ratings for pricing and issuance of bonds and other financialproducts, has a critical influence. In the sweeping global credit rating agencies in thefinancial crisis, so the poor performance of these rating agencies seriously misled themarket, the mainstream argument is a conflict of interest of rating agencies has beendeeply embedded in the business model of the issuer to pay, and an impact on thecredibility of its own the main factors. This creates a credit rating mechanisms interestsand reputation of a paradox: on the one hand, the rating agencies must give the subjectobjectively correct rating, otherwise it will affect the reputation of the institution,thereby affecting the long-term development agencies; On the other hand, rewardrating agencies is provided by the employer, once the rating agencies made against theemployer’s rating, the rating agency rating this income will be affected. Therefore, it isnecessary from the type of conflict of interest, causes exist, the need to control conflictsof interest and lack of American success in reducing conflicts with regulatory reformprocess is analyzed in order to provide reference for China in the field of construction ofthe system, measures proposed in this paper are: from the internal point of view, toimprove the internal control mechanisms of rating agencies, the issuer pays modelcorrection; from the outside perspective, to strengthen the regulatory and legislative,legal liability for wrongful rating agencies should be investigated.Conflict of interest behavior will affect the credit rating agencies rating theindependence, resulting in poor accuracy rating results. Charging bias, rating agency governance management deficiencies, inadequate legal accountability, regulatory andmarket reputation mechanism improper lack of binding is the main reason of theproblem. Since the international financial crisis, the international community hasdeveloped a number of measures to regulate the behavior of rating conflict of interest.Based on the course of the study, from the conflicts of interest credit ratingcontradictions as the starting point, in-depth understanding of grading system, and thusopen a gap credit rating system, analyzes the contradiction lies, and strive to find theproblem while solving problems with innovative and reality.

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CLC: > Economic > Fiscal, monetary > Finance, banking > China's financial,banking > Credit
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