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Fitch’s US downgrade: The principal-agent problem in modern finance

Rating agencies pose risks to financial markets. Investors need to monitor and understand how they work

    • When Fitch Ratings downgraded US sovereign credit, some disagreed, while others felt it hadn’t come soon enough. But most market participants greeted the news with a collective shrug.
    • When Fitch Ratings downgraded US sovereign credit, some disagreed, while others felt it hadn’t come soon enough. But most market participants greeted the news with a collective shrug. PHOTO: REUTERS
    Published Tue, Sep 5, 2023 · 04:53 PM

    FITCH Ratings’ downgrade of US sovereign credit from AAA to AA+ highlights a latent principal-agent problem in modern financial markets: Investors have outsourced much of their risk management to the rating agencies.

    But the problem goes beyond just risk management and the rating agencies. Before Standard & Poor’s reduced its credit rating for the US in 2011, financial contracts referred to “risk-free” or liquid assets as AAA-rated securities.

    Considered “good collateral”, these assets were a requirement in most financial transactions.

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