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

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

The issuer-pays model is criticized because the party being rated also pays the agency, creating a potential conflict of interest. Issuers may shop for favorable ratings, which was a concern for structured finance ratings before the 2007-2009 crisis.

  1. AIt forces agencies to rate only investment-grade issuers
  2. BIt creates a potential conflict of interest because the issuer being rated pays for the ratingCorrect
  3. CIt prevents agencies from publishing ratings publicly
  4. DIt makes ratings depend solely on quantitative models

Explanation

Under issuer-pays, the entity whose debt is rated pays the fee, which may create pressure to give favorable ratings or lead to rating shopping. This concern was prominent in the 2007-2009 crisis for structured products. The other options do not describe the model.

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