SWOT Analysis of CRAs
Strengths: My opinion and stand on the necessity of credit rating agencies entirely depend on the SWOT analysis conducted below.
In considering their strengths, their main advantage lies in their ability to can take a neutral position on the performance of an entity. Unless there is a compromise by other means such as corruption and taking a partisan position, they remain capable of fulfilling the reason of their existence. They still have an ability to create modern models and respond timely to economic changes through anticipating and forecast projected trends. Weaknesses: However, their non-interested party approach in the assessment of an entity is also a weakness created by the absence of policy that would create an obligation. This means that if they choose to lean on one side, there are little implications for the agency itself unless a policy imposes a consequence to such conduct.
It is my position that this has been the motivator behind previous not so pleasing events. Another potential weakness arises from the inward organization of the agency s pointed out in the SEC report concerning the need for better internal control systems. Such ICS control failure and diligence gaps enunciate in the case of Moody Investments Securities (MIS) case in 2007 when one of their analysts discovered a coding error n computerized data that had changed a credit rating models data by two notches. Policy makers argue that the world will not forget in any hurry what happened in 2007, this will be a constant reminder on the weaknesses of rating agencies especially when majority of them overrated securities encouraging reckless buying only to shock investors with a downgrade (Herring 2009, pp.21).Opportunities: Credit rating institutions have massive opportunities that will gain the confidence from all quarters.
Many policy makers feel that they have cemented their position. Therefore, no other institution can actually claim to fill the gap they would leave better. This is the case given the bombardment of information to investors. Without CRAs helping in making sense out of it, investor decisions would be much daunting. Scholars and business players argue that what CRAs need is regulation but ignoring them may not be possible. A strengthening factor for CRAs is the legal recognition and addition to list of regulatory procedures that they have been receiving (Shapiro 2009, pp.
12). Threats: A myriad of threats face CRAs, first among them is the changing dynamics of business entities requiring better models. This threat gets worsened by a difficulty encountered in modifying existing or developing new models to accommodate these demmands. Conflicts of interests and free-rider problem also feature prominently among factors threatening CRAs credibility. Articulating the interests of the end user of their information is a problem yet it remains the main solution to the two threats mentioned above (StandardandPoor’s 2012, pp.
3).In concluding whether credit rating institutions are a necessity, it is essential to note an intriguing fact; the world market existed and traded well for long in the absence of credit rating institutions, but does this mean we can dispense with them? My answer is no; the market at that time traded on assets that did not require much analysis unlike the complex modern situations. Even that being the case, other stakeholders have opined that credit defaults swaps or credit spreads can replace them agencies. Indeed this would satisfy the future information we need but still nothing would replace CRAs in evaluating illiquid assets credit worth. My opinion that CRAs are an essential part of today’s business drws from the fact that I am not in haste to forget the transparency CRAs brought to market, the new methods of risk evaluation they brought and more so, the reality that we need these two assets more than before. Taking this advised position and proposing a well thought regulation mechanism is a fundamental step to take (Shapiro 2009, pp.9-12)