Chapter 1: Introduction
The leading credit rating agencies (CRAs) Moody’s, Standard & Poor’s and Fitch gained prominence in the financial markets. Since the global financial crisis hit the world economy in 2007, significant concern has been raised about the role of CRAs and the use of their credit ratings. Recent events have attracted the attention of regulators, lawmakers, market participants and academic researchers to the dubious rating practices of the leading CRAs. First and foremost, the leading CRAs bear a part of the responsibility for causing the subprime mortgage meltdown. They gave their highest ratings to novel mortgage-related securities that turned out to perform very poorly. In addition, the leading CRAs are accused of exacerbating the euro debt crisis by downgrading Greek bonds just as European officials were about to unveil a support plan. The strong effect of rating announcements on the financial markets highlights the continuing reliance on leading CRAs despite their numerous shortcomings. Although the novel financial instruments that they were rating collapsed, the leading CRAs did not suffer much from the financial meltdown directly. Since their inception, CRAs have survived many financial crises regardless of their repeated rating inaccuracies. Surprisingly, they even become more powerful in the aftermath of financial debacles. From the perspective of the financial system, this gives rise to an unsustainable situation. Given this context, financial regulatory reforms are the most important catalysts for change in the rating industry. CRA reforms have thus enjoyed a prominent place in regulatory efforts made in response to the 2007–2009 global financial crisis.