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
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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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