Credit Bias: Political and Systemic Racial Bias in Government Ratings

University of Michigan Professor Dr. Davon Norris joins Kristina Vaccaro, Director and Fixed Income Tax-Exempt Analyst for Bank of America, N. A., to discuss Dr. Norris’s research on political and systemic racial bias in government ratings. In one analysis, using the factors in Moody’s rating “scorecard” to predict credit ratings, Norris shows how credit performance on scorecard criteria, which translates into higher or lower scores, and therefore lower or higher interest burdens, varies depending on the political leaning of the municipality—a poor-performing conservative city is estimated to have an almost two-notch higher rating than an average-performing liberal-leaning city. As the conversation illustrates, there are many other biases baked into the process by which cities are assigned credit ratings, and thus obtain capital at terms that may not reflect their true financial health.