Are Rating Agencies Powerful? An Investigation Into the Impact and Accuracy of Sovereign Ratings
IMF Working Papers, January 1, 2012
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Bibliographic details
- Authors: John Kiff, Sylwia Nowak, Liliana B Schumacher
- Published: January 1, 2012
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781463931858.001
Key findings
- Credit Rating Agencies (CRA)'s opinions have an impact in the cost of funding of sovereign issuers and consequently ratings are a concern for financial stability.
- Ratings produced by the major CRAs perform reasonably well when it comes to rank ordering default risk among sovereigns.
- There is evidence of rating stability failure during the recent global financial crisis.
- These failures suggest that ratings should incorporate the obligor's resilience to stress scenarios.
Empirical evidence and interpretation
- CRA opinions affect sovereign funding costs, linking rating actions to financial stability considerations.
- Major CRAs generally succeed at rank ordering sovereign default risk, indicating useful cross-sectional discriminatory power.
- During the recent global financial crisis, rating stability failed in ways that undermine reliance on ratings alone for assessing sovereign resilience.
- The authors infer that ratings ought to better reflect resilience under stress scenarios.
Policy recommendations and implications
- Reform initiatives to reduce the impact of CRAs' certification services are supported by the empirical evidence.
- More stringent validation requirements for ratings are recommended if ratings are to be used in capital regulations.
- Increased transparency is recommended with regard to the quantitative parameters used in the rating process.
Publication and metadata
- Authors: John Kiff, Sylwia Nowak, Miss Liliana B Schumacher
- Publication date: January 1, 2012
- Series: Working Paper No. 2012/023
- Issue: 023
- Volume: 2012
- Pages: 35
- DOI: https://doi.org/10.5089/9781463931858.001
- Stock No: WPIEA2012023
- ISBN: 9781463931858
- ISSN: 1018-5941
- Subject: Credit, Credit default swap, Credit ratings, Credit risk, Emerging and frontier financial markets, Financial markets, Financial regulation and supervision, Money
- Keywords: Credit, credit default swap, credit rating agencies, Credit ratings, Credit risk, Emerging and frontier financial markets, Global, Moody's rating, rating action, rating agency, rating category, rating change, rating stability, Sovereign ratings, WP
Are Rating Agencies Powerful? An Investigation Into the Impact and Accuracy of Sovereign Ratings — IMF Working Papers (Working Paper No. 2012/023).