By providing creditors with information on the creditworthiness of borrowers, credit ratings agencies (CRAs) play an important role in the efficient functioning of capital markets and influence the flow of finance towards countries, companies and projects across the globe. However, the financial crisis highlighted questions about the effectiveness of CRAs in providing accurate and unbiased information, and demonstrated the impact inaccurate ratings can have on the stability of the international financial system.
While credit ratings in the corporate sector have been less controversial, there have been concerns regarding the accuracy of ratings on structured finance and sovereign debt. The ECOSOC meeting will build on the General Assembly Thematic Debate on “The role of Credit Rating Agencies in the International Financial System” that took place on 10 September 2013. That thematic debate highlighted several shortcomings in the credit rating industry that became particularly apparent after the 2008 crisis. These include the hard wiring of ratings into regulatory frameworks and excessive reliance of investors on ratings, a high level of industry concentration resulting in lack of competition, low transparency, conflicts of interests due to the issuers’ pay model (i.e. issuers pay the agencies to obtain ratings), pro-cyclicality of ratings which have contributed to volatility in the real economy, and the considerable influence which sovereign debt ratings wield on the ability to borrow and to finance development.
The meeting will expand on these issues and introduce additional ones relevant to assessing the impact of credit rating agencies on financing for sustainable development. It will examine practical ideas to propose as inputs to the Third International Conference on Financing for Development (Addis Ababa, Ethiopia, 13-16 July 2015) and will serve as a contribution to the substantive discussions of the preparatory process for the Conference.