Credit Rating Agencies Are Powerful Market Forces, For Better Or Worse

Credit rating agencies in Canada

The top rating agencies in Canada are DBRS Limited, S&P Global Ratings Canada, Moody’s Canada Inc. and Fitch Ratings, Inc. They have each been recognized as a designated rating organization under Canadian securities laws.

Canada held a triple-A rating for years until Fitch Ratings downgraded it to “AA+” in June 2020, a move it explained was because of the country’s deteriorating public finances, increased government spending and higher debt ratios.

However, Moody’s, S&P and DBRS have maintained their highest rating for the country throughout the pandemic.

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The role agencies played in the 2008 financial crisis

The major rating agencies faced heat for their role in the 2008 credit crisis, having assigned high ratings to financial products based on U.S. mortgages that were at a high risk of defaulting. And when those subprime mortgages did default, it tanked debt markets worldwide.

In a 2011 survey of Chartered Financial Analysts reported by the Globe and Mail, 71% of respondents said credit rating agencies played a major role in the 2008 financial crisis.

The Globe’s survey showed most respondents were in favour of greater oversight of credit rating agencies and requiring them to provide greater disclosure.

In a report released in 2008 by the Bank of Canada, the federal agency acknowledged that overreliance on credit rating agencies’ ratings led to “ongoing turbulence in financial markets.”

Going forward, the Bank and government stated those ratings wouldn’t be “accorded undue weight as a summary statistics of risk.” It also noted that credit ratings would continue to be just one of the many tools the Bank uses to manage credit risk.

In other words, because they didn’t warn investors about the trouble in the U.S. mortgage market, credit rating agencies don't hold the same authority they once did. And going forward, they’re unlikely to enjoy that same level of authority again.