Question

14. Describe the potential conflict of interest that exists between credit rating agencies (Moody’s, Standard and Poor, and Fitch) and companies to which they are giving bond ratings?

Answer 1

(14): The credit rating agencies are paid by the banks and companies they are supposed to rate objectively. This is the biggest conflict of interest as it dilutes the level of objectivity from the rating process. Ratings are often matched and given as per the client’s (i.e. the issuer’s) requirements.

Secondly, potential conflict of interests may arise between credit rating agencies (Moody’s, Standard and Poor, and Fitch) and companies to which they are giving bond ratings when the rating agencies offer consultancy and other advisory services to the issuers that it rates as well. The case that often exists is that issuer of bonds are under pressure to purchase consultancy and advisory services form credit rating agencies in return for improved rating. This often leads to the case of ‘notching’ – i.e. credit rating agencies lowering rating for issuers which they have not rated. There is also the issue of solicited ratings vs unsolicited ratings.