Saturday, May 19, 2007

Credit Rating Worries

Per Kurowski, a former ED of World Bank is doing CFA exams and wonders;

Explain whether you agree or disagree with the following statement: “The credit risk of a bond is the risk that the issuer will fail to meet its obligation to make timely payments of interest and principle”

If I had answered the above with a YES, as anyone would have intuitively done, had they not peeked in on the updates, I would have distanced myself further from my CFA certification since the right answer indicated is a “NO”, among others because the (modern) credit risk now includes a “Downgrade risk, which is the risk that an issue will be downgraded by a rating agency”

And so now, instead of having to focus on the true object of the credit risk, we must also focus on the side issue of the opinions of the credit rating agencies, and that Sir, though we might feel all cosily comforted by more knowledge, does not really seem to put the world on a wiser financial track.

I do not mind credit rating agencies but, if we are forced by financial regulators to go by their criteria, then they should be forced to be equally responsible for them. Alternatively, let them hang around, giving their First Amendment protected opinions, but do not force anyone to have to follow them

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