On The Credit Rating Agency Conflicts Of Interest And Its Supervision System

It has been over a-hundred years since the first credit rating report, written by Mr. John Moody, was issued.credit rating agencies has gradually been positioned by he modern international capital market as "pass" and "gatekeeper" and has earned the trust of both issuers and investors, playing an important influence in the international financial market. However, despite making an increasingly louder voice, its fundamental value of risk assessment has been weakened, Poor performance during "Enron Event" and the "Subprime Crisis" demolished the credibility of credit rating agencies. Since then, few investors regard them as trustworthy guide of investing activities. After the crisis,the prosecution of US Department of Justice sank the status of its colleague agencies.Just before the subprime mortgage crisis took place, credit rating agencies retained high credit rating on relevant derivative securities, revealing the absence of its risk-warning ability. The drastic downgrade of both subprime mortgage bonds and its issuing agencies has not only been a late revelation of default risk which leads to massive panic in the capital market as well as the destruction of investing confidence, but also made firms, which has already been in trouble, suffer from more server problems as their credit ratings kept on getting downgraded. It’s the disappointing performance of credit rating agencies during the crisis that revealed their ability of making a real mess, and made it clear that their fundamental problem attributes to the conflict of multiple interests.Credit-rating agencies provide information and guidance to financial markets, the diversification of its function led to the diversification of relevant parties. Diversified interests from different parties can be revealed by the business pattern of these agencies. Those conflicts can be the differentiation of payment method, conflicts between primary business and subsidiary business,as well as the conflicts between employees and external environment. Once the conflict became unsolvable, a series of mistakes from prior investigation to ex post follow-up work will be revealed, leading to the destruction of the credibility and reliability of credit rating and even the impairment of the healthiness of financial market.In the post-crisis era, advanced economies such as the United States attached more importance to the solution to the conflict of interest during their reform of regulation on credit-rating. In 2009,the United States promulgated the Dodd-Frank Wall’s Street Reform and Consumer Protection Act, in the same year, EU promulgated the European Union Credit Agency Regulations, which was followed by Credit Rating Agency Ordinance(w CRA regulations). All these act and rules involve contents regarding the restriction on conflicts between interests as well as reform of the assessment of credit-rating personnel. In the year of 2014, a worldwide credit rating group was initiated by China, the U.S. and Russia to advocate bilateral rating system. There are similarities and differences among reforms of different countries. While deficiencies still exist, we should acknowledge the advancement of supervision on credit rating agencies. The most crucial measure to restrict conflicts of interest and to normalize credit-rating market is to build a brand-new, unified credit-rating system. Overall, the question of how to improve both the internal governance and external regulation of credit rating agencies, and the question of whether to strengthen the legal accountability of credit-rating agencies account for a vital part in the enhancement of credit-rating agencies.