Financial Institution Regulation: More Smoke and Mirrors?

Moody’s Threatens to Cut Credit Ratings of Banks By Peter Eavis - pub. New York Times / Dealbook - August 22, 2013(1)  

Comment from American Banker:

Downgrade Ahead? Moody's threatened to downgrade the nation's largest banks on Thursday, believing that the government is more likely to let them fail in the event of another financial crisis. The move, which could affect Goldman Sachs, JPMorgan Chase, Morgan Stanley, Wells Fargo, and possibly Bank of America and Citigroup, is likely to stoke the fire around the continuing "too big to fail" debate. "Moody's decision to review the ratings will reinforce the beliefs of those who say Dodd-Frank's measures are sufficient to deal with the 'too big to fail' issue," notes Dealbook. "But the actions of lawmakers who do not feel the act is adequate may have also contributed to Moody's actions." Standard & Poor's expressed similar sentiments about downgrading big banks back in June, believing that, while government bailouts were still a possibility, bondholders may be forced to shoulder losses, notes the Financial Times.


Is the revenue model for the Nationally Recognized Statistical Rating Organizations (NRSROs)(2) still ‘issuer pay’ (rather than ‘user pay’).(3)

Subsequent to the real estate bubble bursting and the subsequent great financial crisis has the Securities and Exchange Commission developed and implemented sufficient auditing procedures to test the efficacy of the ratings issued by the NRSRO’s.
If the government is strictly enforcing the rigorous stress testing of banks, and if these stress tests use adequate testing procedures and ungameable testing criteria, why wouldn’t the rating agencies be more willing to accept the output from those stress tests as testimony to the safety-and-soundness of the individual financial institutions?
Shouldn’t the government’s stress tests be a better measure of the safety-and- soundness of a financial institution, than is a NRSRO’s quality rating? In my mind, the government’s stress tests should be a better (and more objective) measure of a financial institutions’ safety and soundness, because the government is theoretically protecting investors and taxpayers, while the NRSRO’s may be somewhat conflicted by their ‘issuer pay’ revenue model.


1.  Moody’s Threatens to Cut Credit Ratings of Banks By Peter Eavis - pub. New York Times / Dealbook - August 22, 2013,at:  

2. The history of the Nationally Recognized Statistical Rating Organizations, at: http://http//

3.  For more on the ‘user pay’ ‘issuer pay’ revenue models see The Credit Rating Controversy pub. Council on Foreign Relations Campaign 2102 Backgrounder, at: http://http//