Skip to content

FRM Part I · FRM Exam Part I · Anatomy of the Great Financial Crisis of 2007-2009

A critique of credit rating agencies (CRAs) in the run-up to the crisis concerns the 'issuer-pays' model. Which statement best describes the conflict of interest it created?

Under the issuer-pays model, the arrangers of structured products paid the rating agencies and could shop for the most favorable rating. This gave agencies an incentive to be lenient to win fee-generating business, which compromised the independence of the ratings.

  1. AInvestors paid CRAs, which led them to give lower ratings to protect investor returns
  2. BRegulators paid CRAs, which led them to rate only government securities
  3. CIssuers of structured products paid for ratings and could shop among agencies, which created an incentive to give favorable ratings to win businessCorrect
  4. DCRAs owned the securities they rated, so they benefited from downgrades

Explanation

Under the issuer-pays model the arranger of a structured product pays the agency and can choose the agency offering the best rating. This created pressure to be generous in order to retain fee income. The investor-pays description is the opposite of the model used.

Did you get it right without looking?

One question tells you little. A timed set on Anatomy of the Great Financial Crisis of 2007-2009 shows your real accuracy, how long you take and where you lose marks.

Practise Anatomy of the Great Financial Crisis of 2007-2009Free diagnostic mock

More Anatomy of the Great Financial Crisis of 2007-2009 questions