rating agencies (3)

A further potential problem with rating agency judgments has developed as a result of the complete dependence of some lenders on their assessments .This has resulted in the maintenance of specified minimum credit rating being included as covenant in medium term loan agreements .This means that the rating agency itself can trigger a loan default by changing it is credit rating of the borrower. There have been suggestions that the rating agencies have come under pressure from lending institutions and/or investors not to precipitate such developments thereby bringing their objectivity into question .
it is apparent that rating agencies do not always have superior knowledge . where lending institutions abdicate responsibility for credit assessment to some third party ,they lose control and take a different kind of risk.The underlying principle has to be that if you relinquish the task of credit assessment and rely on someone else,You had better be sure that that party does indeed have better Knowledge and judgment than you yourself could apply.