Lahore School of Economics

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Rating the Rater: Rating Agencies role in financial crises; lessons learned; the way forward

Shahzad Saleem, CFA, FCA, Chief Operating Officer Pakistan Credit Rating Agency Limited

Rating Agencies (CRAs) give opinion as to relative strength of any entity to meet financial obligations. Like any business in the world, the business of CRAs comes with its own risk. The risk is: Opinion going wrong. The latest edition of financial crises brought this risk to limelight. This magnified their penetration into our financial decisions. Investors had to incur significant losses when a number of rating opinions faltered. They were either late in identifying the risk (subprime mortgage loans) or hasten the crises by magnifying some risk (Banks and sovereign rating). Were CRAs negligent, incompetent, or dishonest? ; we are still looking for the answer. Raters are being rated. Rating agencies are still around and growing. Investors continue to believe in their opinions. We as a system value the ratings. Why? Can’t they fail us again? Notably a lot has changed for positive. Regulators realize the importance of strong oversight on CRAs; new laws, comprehensive code of conduct are being implemented. CRAs, more than ever, know that while being transparent they have to be intelligent in their methodologies and practices, For investors rating opinions are key inputs for final decision, but not the only tool. It is a better system now. We have to understand ratings. These are not just opinions – these are knowledgeable and independent. If done right a rating provides valuable information to investor – the likelihood of default; but on a relative basis, not standalone.

Mr. Shahzad Saleem is Chief Operating Officer at PACRA. He has held several positions beginning his career as an analyst at PACRA in 2000. He leads multiple developments at PACRA including technological advancements and rating criteria with a structured and consistent approach. While being responsible for overseeing work planning, execution and its monitoring, his role includes mentoring an expanding team of young analysts and guidance to unit heads. Prior to joining PACRA, he was associated with a leading firm of Chartered Accountants and worked there for more than 5 years, taking his overall working experience to 17+years.

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posted by S A J Shirazi @ 5/30/2014 11:30:00 AM,

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