CRA

Question 1

Deficiencies in CRA

Answer 1

1. They are in a position to play as a quasi regulator while seeking profit. Conflict of interest
2. Market is dominant by only 3 raters.
3. Advisory services while guarding the financial system
4. They did not have enough skills to deal with complex SF products. idiosuncratic risk was ignored by them
5. Investors considered CRA rating as a gospel, didn’t do their due diligince

Question 2

Potential improvements with regards CRA

Answer 2

1. Remove the market dominance, disperse the market
2. Insulate their advisory services
3. Increase disclosure requirements abou their specific ratings formilation

Why cant we make CRAs explicit regulator?
potential conflict of interest with regards to that certain jusrisdictions bond rating