US Financial Crisis: Effects on Global Banking



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Code : ECC0008

Year :
2008

Industry : Banking, Insurance and Financial Services

Region : US

Teaching Note: Available

Structured Assignment : Available

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Credit Rating Agencies: Evolution and Performance The concept of credit rating has its origin in theUS. In themid-19th century,when the railroad industry started expanding andwas in need for additional capital, it issued private corporate bonds.Many fromthe investing classwere attracted by the development of the rail industry and expected the railroad companies to disclosemore informationwith regard to their debts and repaying capability. Observing the potential for enlargement in the industry, Henry Varnum Poor took the initiative to publish the financial and operating statistics ofmajor railroad companies.Hewas the first to publishManual of theRailroads of theUnitedStates in 1868.3 The publication also included business conditions. In 1909, John Moody, taking the process a step forward, issued the first credit ratings in theUSbasing on assets and liabilities of a particular company.Since then, the concept has developed extensively in the global financialmarkets and countless number ofCRAs started assessing the risk of the companies and grading them...

CRAs: Guiding Investors The objective of an investor is tominimise the risks andmaximise the returns on investments.They expect the company, inwhich theywant to invest, to disclose all possible information related to sales, revenues and different parties connectedwiththe company's operations. Theywill be keen in knowing all the information,which influences their investment decision. For making sound investments, potential investors have to collect, analyse and conclude the performance of various companies to choose the best alternative....

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Rating Changes: The Cost ofMisinterpretations For decades, the three major CRAs – S&P, Moody's and Fitch – have been ruling the financial market by rating the financial health of governments,multilateral organisations andmainly financial companies that actively participate in the international capital markets. The statements given by CRAs have a huge impact on the cost of funds (borrowings). However,many a time, S&P andMoody's went wrong in their ratings (downgrade/upgrade) (Exhibit III). That wasmajorly because of the changes inmacro andmicro environments that are next to impossible to predict.Moreover,movements in economic variables, which are extremely volatile to the slightest of changes,make thingsmuch complicated....

The Role of CRAs: Are Amendments Necessary? In the light of theUS subprime credit crunch,manymarket analysts criticised the performance and accuracy ofNRSRO (NationallyRecognisedStatisticallyRatingOrganisation) in predicting problemswith structured finance products.Acommittee for investigating the role of CRAs was formed by the SEC, which will work out on the issues of improper ratings, forMBS because of conflicts of interests. SECcomplains thatCRAswere not up to themark at scanning the performance of CDSs, which touched $58 trillion in the past decade and which are main disruptive securities. Rating firms are involved in aggressive competitive practices...








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