February 22, 2022
Rating the Credit Rating Agencies Over the Pandemic
The global financial crisis of 2007-2008 and the COVID-19 recession have provided significant stress tests of the performance of the credit rating agencies. In a new insight, Director of Financial Services Policy Thomas Wade explores how the performance of credit rating agencies should be considered over the course of the COVID-19 pandemic, particularly when compared to the global financial crisis.
The global financial crisis represented a failure of instrument and issuer. The inappropriate valuation of highly complex securitized mortgages triggered in turn the collapse of investment grade issuers. Neither of those sources of global systemic economic stress are apparent in the COVID-19 recession and aftermath. It remains to be seen whether the credit rating agencies could cope with a similar set of circumstances, although regulation and better risk management at the credit rating agencies themselves would suggest that they are considerably better equipped to do so. In these quite different circumstances, however, the credit rating agencies have stabilized markets, provided timely price-sensitive information to investors, and have accurately predicted which instruments and issuers would most likely fail.