Previous Page Next Page 
(c)  2025 Columbia University Press. All Rights reserved.

Pandora’s Risk: Uncertainty at the Core of Finance resources

Extracted Text (may have errors)

8 Credit- ability Credit rating has spawned a huge industry, far more complex than the simple counting game at its core. Still, uncertainty pervades ratings and deserves more disclo- sure. This needn’t make ratings gyrate wildly. In analogy to magnetism, a mild preference for agreement on rela- tive safety can induce remarkable stability. The fl ip side is that a few defaults can trigger widespread ratings shifts. Th dence in Western fi nance occasionally e marvel is less that public confi plummets than that so much persists and rebuilds. It’s like a starfi sh grow- ing back arms. One of the confi dence boosters is credit rating. Credit rating proper is associated with regulators and with major credit rating agencies like Moody’s and Standard & Poor’s (S&P). By con- vention, credits are assigned letter grades. Triple- A (Aaa for Moody’s, AAA for S&P) is the highest rating, followed by double- A, single- A, triple- B (or Baa), and so on down to C. Grades below triple- A are subdivided by number or plus- or- minus sign and sometimes attach warnings of immi- nent migration. In general, any ranking of credit safety, including the ranking implicit in trading, can be considered a credit rating. Nearly every major fi nancial institution has credit scoring departments or uses third- party scoring ser- vices. Some ser vices, like Riskmetrics or CreditRisk+, provide a mixture of scores and advice on scoring methodology. Th is chapter will examine the ratings pro cess in more depth. We will fi er all, and warrants nd that the counting game isn’t so simple aft respect. However, it pretends to more precision than it can deliver. Much of the agreement we observe about risk is just a form of social bonding.

Help

loading