This thesis described in detail the role of credit rating agencies in the modern financial system
both during favorable economic conditions and at times of global crisis. A historical overview
explained why the credit rating agencies came to be and how their influence on the market has
gradually expanded over the years. The credit rating industry was then analyzed to provide
insight into who the most significant market participants are, which factors do CRAs consider
when issuing ratings and how and by whom the entire industry is regulated.
CRAs have in many ways influenced the events of the latest financial crisis. Their false, overly
optimistic ratings and reliance on models that did not hold up in reality were one of the reasons
why the investors and the general public were misinformed about the situation on the market.
Moreover, they did not anticipate the burst of the housing bubble, which caused great losses in
the US and Europe, not only in the financial, but also in the real sector.
Despite their involvement, CRAs should not be the only party blamed for causing the crisis. A
combination of lenient bank and credit regulation, disregard of common sense and risk
management by the market participants and a relentless quest for quick speculative profit were all
factors that contributed to the crisis.
The real lesson of the latest crisis is therefore left with the participants on the financial markets.
Common sense and prudence are underestimated, investors tend to place faith in complicated
mathematical models and invest in securities that they do not even understand. Such investments
can result in high profits or high losses, as is the nature of speculation. Placing the entire blame
on CRAs is therefore unjustifiable, since they clearly state that the ratings represent only their
opinion and should not be considered as investment suggestions. Market participants were now
given a lesson in what can happen when you listen to someone else without thinking for yourself.
Let’s just hope that this lesson is remembered for all the future crisis and challenges to come.
No one can deny that CRAs play a major important role in the functioning of financial systems:
they are responsible for reducing information asymmetry between the lender and the borrower,
facilitating world trade through rating international securities, corporations and even sovereign
states and are one of the main reasons that financial markets were able to grow at such high rates
in the last couple of decades.
Looking towards the future, it is of vital importance that solutions to some of the problems of the
industry described in this thesis be found. Efficient regulation, increased transparency,
competition, and a fair business model could go a long way in making the credit rating industry
and the whole financial markets more secure and efficient. Finally, the lessons of this financial
crisis and the ones before it will be forgotten if the investors and market participants do not start
being more risk averse and making prudent decisions based on their own analysis and perception
of the market instead of blindly following the ratings that the CRAs are issuing.
CRAs are not perfect and they never will be, but with a coordinated effort of all the market
participants, they might become the true “lighthouse of risk”, as they were initially intended to
be. With the help of objective ratings and timely reaction to the changing market conditions by
the CRAs, some future crises may be prevented, or their effects reduced.