1. Rating Agencies and Financial Crisis
Asim Yaqub
Kushal Bhalla
Abbes Tangaoui
Amir Zemoodeh

3. CREDIT RATING AGENCIES
Firms that offer judgment about the credit- worthiness of debt instruments, specifically their likelihood of default
Evaluate the securities of various companies against a probable default risk
Providers of independent research and in-depth credit analysis
Use different policies, procedures and practices comprising of rating models and rating criteria, assumptions, methodologies and etc

4. CREDIT RATING AGENCIES
Agencies serve industrial groups by providing corporate ratings, financial institutions ratings, fund ratings, insurance ratings, governments ratings and structured finance ratings
Rating agency team of credit rating agencies
Various rating scales are used for investment grade (AAA, AA, A, BBB) and speculative grade (BB, B, CCC, CC, C) securities
Three Bigs: Moody’s, S&P and Fitch

6. Rating Process Rating Company Rating Applicant Rating Group
Rating Model
Audited Financial Statements, Non-Financial Information (Shareholder Structure, Strategies, Market Share, …), Market and Industry Analysis, Macroeconomic Analysis
Rating Company
Management meeting with high level managers
Rating Committee

7. Moody’s Methodology to Rate RMBS
Independent Third Party
Collateral
Key Borrower Characteristics (FICO Score, Documentation)
Key Property Characteristics (Location, Occupancy)
Key Loan Characteristics (Loan to Value Ratio, Loan Term, …)
Simulation of Default by Scenario analysis Calculate Loss Distribution
Moody’s Mortgage Metrics (MMM)
Servicer
Rating Committee
Originator
Legal Considerations
Debt to Income Ratio
Risk of Early Delinquency
Macroeconomic Environment
Mortgage Insurance
Interest rates
Home Price Changes
Unemployment rates
Macroeconomic Inputs

8. CRA’s Role in Financial Crisis
Quantity and Complexity
Rating Criteria
Internal Documentation
Surveillance Process
Internal Audit
Quality of Information
Conflict of Interest

9. Conflict of Interests
Legislation requires the SEC to adopt rules on the way CRA are paid to enhance reliability on ratings and post-rating surveillance
prohibits rating agencies from providing services other than rating services to companies that contract for rating

10. Corporate Governance
Regulators seek to improve corporate governance practices at credit rating agencies
Require credit rating agencies or their parent companies to have a board of directors, to assume responsibility of sensitive functions for credible ratings
Clarify and expand the authority of the compliance officer
Ensure the independence of the compliance officer

11. Regulatory Oversight
Regulation stipulates the creation of new office within the SEC to oversee ratings agencies
Rating agencies will be required to be registered with the SEC
The SEC will conduct inspections for compliance with procedures for reliable ratings
Authorize the SEC to impose fines for violations

12. Liability
Legislation reduces significantly CRA liability protection

13. Reliance on Ratings
To reduce reliance on ratings, regulators have two different approaches:
House bill eliminates reliance on ratings entirely
and the Senate bill requires only a GAO study

14. Transparency
Regulators require new disclosure requirements from credit rating agencies
The rating methodologies
The quality of data
Business relationships that may create conflicts of interest
disclosure of post-rating surveillance practices

15. Universal Ratings Scale
Reforms require NRSROs to implement clear policies and procedures to assess default risks, to clearly define different symbols for structured finance products, to indicate that theses products may carry high risk