Describe two conflicts of interest that occur in creditrating agencies.
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Describe two conflicts of interest that occur in creditrating agencies.
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Credit rating agencies play a crucial role in financial markets by assessing the creditworthiness of entities issuing debt securities However conflicts of interest can arise due to the nature of their business model and relationships with clients Here are two common conflicts of interest IssuerPays Model One of the primary conflicts of interest in credit rating agencies stems from their reliance on the issuerpays model In this model the entities seeking credit ratings pay the rating agencies for their services This creates a potential conflict because the agencies may feel pressure to provide favorable ratings to maintain or attract business from issuers If rating agencies were too stringent in their assessments they risk losing clients to competitors who may offer more lenient ratings As a result theres an inherent incentive for rating agencies to provide ratings that please issuers potentially compromising the independence and accuracy of their assessments Structured Finance Products Another conflict ...View the full answer
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Related Book For
Economics Of Money Banking And Financial Markets
ISBN: 9780134734200
5th Edition
Authors: Frederic Mishkin
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