Skip to content

FRM Part I · FRM Exam Part I · External and Internal Credit Ratings

Which of the following is a commonly cited criticism of the issuer-pays model used by major credit rating agencies?

The issuer-pays model creates a conflict of interest, because the entity whose debt is rated pays the agency. This can encourage generous ratings to win or keep business, a concern raised particularly around structured products in the financial crisis.

  1. AIt prevents agencies from rating structured finance products
  2. BIt creates a potential conflict of interest because the entity being rated pays for the rating, possibly encouraging rating inflationCorrect
  3. CIt requires agencies to publish ratings only after investors have purchased the debt
  4. DIt forces agencies to use only quantitative data and ignore qualitative judgment

Explanation

Under the issuer-pays model the issuer pays the agency, so the agency may be tempted to give favorable ratings to retain business, a concern highlighted in the 2007-2009 crisis for structured products. The other options describe things that are not features of the model.

Did you get it right without looking?

One question tells you little. A timed set on External and Internal Credit Ratings shows your real accuracy, how long you take and where you lose marks.

Practise External and Internal Credit RatingsFree diagnostic mock

More External and Internal Credit Ratings questions