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Why have official rating agencies failed in the past, and will they in the future?

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  • Marc Piazolo

    (University of Applied Sciences Kaiserslautern, Amerikastrasse 1,Zweibruecken, Germany)

Abstract

Reforms of bank-capital rules by the Basel committee (Basel II) are due to come into force in 2007. They require bank regulators to use agencies’ ratings as a basic measure of the riskiness of a bank’s credit portfolio, or else the banks have to implement internal rating measure, which have been approved by government regulators. Ratings of the official agencies are like benchmarks in credit worthiness. We will look at two aspects of rating agencies: (1) How can deal with incentive problems like moral hazard, adverse selection based on asymmetric information and the principal agent problem? (2) Sovereign risk has been prominent in the past, especially for emerging markets. We will analyse he accuracy of official rating agencies during the Asian crisis of 1997/1998 by comparing their performance with the results of basic student country risk rankings. The forecasting quality of these ex post rankings seems to be superior to that of official ratings.

Suggested Citation

  • Marc Piazolo, 2006. "Why have official rating agencies failed in the past, and will they in the future?," Ekonomia, Cyprus Economic Society and University of Cyprus, vol. 9(1), pages 3-20, Summer.
  • Handle: RePEc:ekn:ekonom:v:9:y:2006:i:1:p:3-20
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    Cited by:

    1. Alessandro Santoni & Barbara Arbia, 2013. "Assessing Rating Agencies' Ability to Predict Bank Bankruptcy – The Lace Financial Case," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 42(2), pages 203-215, July.

    More about this item

    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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