Is there a problem with the Ratings Agencies

Was initially going to pose this question in the SVB thread, but I think it may be useful to have its own thread so the discussion can be broadened.

SVB had an A rating from Moodys/Fitch/S&P just last week. These same companies are also arguably at fault for the 2008 financial crisis. They play a huge role in decision making for publicly traded insurers to maintain ratings, but does it make sense for so much focus from insurers to go towards appeasing these companies when they have a track record of mis-assessing risk at such large scales

Yes. I assume the rating agencies had some skin in the SVB game, which should not be allowed.
So, how do we prevent rating agencies from having skin?

Introduce a government rating based exclusively on a objective numerical data, something like IRIS ratios only more involved. It sounds like SVB wasn’t able to withstand the asset value reduction due to the sudden interest rate hike. Maybe banks need to be prepared for a 3% increase in a single year and a 5% increase within two years, and the worse the overall reduction in assets, the lower your score.

And stop the nonsense with A++ A+ A -. I’d like to see banks scored across a variety of factors and get a percentile score from 1 to 99. And yes I want the suckiest 1% of banks to be recognized as such - a score of 1. If you want your score to go up, make yourself less immune to all manner of risks. If a bank can get its stock value cut in half overnight it never should have been A-rated in the first place. Let S&P’s and Moody’s continue to give their opinion, but require the official government percentile ranking to always be published beside it. Lord knows we’ve had enough banks and insurance companies fail in this country, can’t we identify the common causes and build a score that encompasses all these risks.

Who would have thought a rating agency reliant on the industry they are rating for making money might not be 100% accurate in its ratings.


Has always been ridiculous that rating agencies are usually paid by an entity that benefits from a good rating. Since 2008 didn’t change the system it is unlikely anything will.

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Bad idea jeans. That’s how we got into the 2008 mortgage crisis.

Lenders DNGAF about the actual creditworthiness of their borrowers… only if their borrowers dotted the right i’s, crossed the right t’s, and had the right cover sheets on their TPS reports.

Credit score is another evil that encourages laziness on the part of lenders and only bears the loosest of correlations to actual creditworthiness.

It’s blind faith in numbers like that by people with no skin in the game that causes problems.

True, but it’s vastly worse that they hire people who know nothing and are straight out of college and then leave it up to the client who is paying for the audit to train the young & green auditor on how to audit them.

It’s not quite hiring the fox to watch the hen house… it’s asking the fox to train the rabbit to guard the hen house.


Isn’t this what Canada does with the MCCSR? Gov’t mandated number, and they get crap if it’s too low.
But I know little about the MCCSR, so I’ve no idea if it tests sensitivity to volatility (maybe not).

One other thing Canada has is Assuris. All the companies collectively agree to bail out any other company. Which in practice means that if one company starts flailing, another company jumps in and buys them before they fail. that keeps everything nice and quiet.
Added,looks like mccsr has been replaced with licat.

The regulation of banks and insurers in Canada is more rigorous than for their counterparts in the US. Having said that, one thing that bothers me is the low level of insured deposits in Canadian banks. It is only C$100,000 versus US$250,000 for American banks. Although the probability of a Canadian bank failure is low it is not zero: folks with sizeable assets should spread their GIC purchases around, for example.

Are you suggesting that the US should move to Basel III i.e principles-based rating system?

MCCSR in Canada tends to be weaker vs Solvency II in UK/Europe for capital requirements, but is still stronger vs US-based capital requirements.