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Enterprise Risk Management by Betty Simkins, John Fraser

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CHAPTER 25Rating Agencies’ Impact on Enterprise Risk Management

MICHAEL J. MOODY

ARM, MBA, Strategic Risk Financing, Inc.

INTRODUCTION

There are many important stakeholders that have had an impact on the acceptance of enterprise risk management (ERM). However, one critically important stakeholder group within the financial services sector that has had a profound impact on ERM over the past few years is the rating agencies. Rating agencies have historically assessed the financial strength of a variety of corporate and governmental entities. In essence, they determine the entities’ ability to meet the interest and principal payments of bonds and other debt obligations. The agencies provide the ratings after studying the terms and conditions of each specific debt instrument, as well as the entities’ overall financial condition. As a result, the assigned rating then reflects the agency’s degree of confidence about the specific borrower’s ability to meet the interest and principal payment, as scheduled.

Credit ratings can be used by bankers, brokers, governments, and other interested parties to help determine the creditworthiness of a borrower. For investors, rating agencies can increase the range of investment alternatives by providing easy-to-use measurements of the relative credit risks. In general, this increases the efficiency of the market by lowering the costs to both borrowers and lenders. The key point to the rating provided by the agency is that it will ultimately determine ...

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