DISSERTATION PROPOSAL EXAMPLEDISSERTATION PROPOSAL EXAMPLEHow the public viewed the role of credit rating agencies in

the financial crisis?

Last 6 years trends in house prices and market (before and after recession)

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Table of Contents

1. Introduction...............................................................................................................................2

1.1 Title..............................................................................................................................................2

1.2 Background..................................................................................................................................2

1.3 Problem identification and Study Rationale................................................................................3

1.4 Study aim and objectives.............................................................................................................3

1.5 Underlying research questions....................................................................................................4

2. Literature Review.......................................................................................................................4

2.1 Role of Credit Rating Agencies in the current Financial Crisis......................................................4

2.2 Need for Regulation of Credit Rating Agencies............................................................................6

2.3 Changes in Regulation after the Financial Crisis..........................................................................6

3. Research Design and Methodology.............................................................................................7

3.1 Research Approach......................................................................................................................7

3.2 Research Design...........................................................................................................................8

3.3 Research Methods.......................................................................................................................8

3.3.1 Sources of Data Collection....................................................................................................9

3.3.2 Research Methods Limitations...........................................................................................10

3.4 Qualitative Analysis...................................................................................................................11

3.5 Population.................................................................................................................................11

3.6 Resource Planning and Timetable..............................................................................................12

3.7 Research Ethics..........................................................................................................................12

3.8 Research Limitations..................................................................................................................13

4. conclusion................................................................................................................................13

References...................................................................................................................................14

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1. INTRODUCTION

1.1 Title

How the public viewed the role of credit rating agencies in the financial crisis?

1.2 Background

Since the 1990’s, the financial crisis has become a regular occurrence around the world. The

current crisis started in the United States in 2007 on the subprime segment of the US housing

market, after which it took on seismic proportions. There is a general agreement that the

Credit Rating Agencies (CRAs) are one of the primary contributors to the current financial

crisis. The agencies miscalculated the risks that are correlated with the structured credit

products and did not adjust their ratings in accordance with the depreciating market. CRA’s

were accused of disregards of conflicts of interests, flaws in rating methodologies, and

insufficient consideration of macroeconomic development as a factor when giving ratings

(Ernest and Young, 2012).

CRA’s were first criticised as a result of the debt crisis, which started in 1997. However,

there was no rush amongst the polity to take any legislative action. In fact, the Code of

Conduct Fundamentals for Credit Rating Agencies, was published by the International

Organization of Securities Commissions (IOSCO) in 2004, clearly indicated that they

preferred a self-regulatory approach. This approach seemed to be quite successful since all

the big CRA’s acceded to the code. But, the current financial crisis, which started in 2007 in

the US, exploded into phenomenal global proportions that there has been a frenzied debate

about the rating methodologies, the credit rating agencies, and the measures that need to be

introduced to minimize the repetition of previous mistakes.

The European Commission has now accepted a regulation, which authorizes the European

Securities and Markets Authority (ESMA) to oversee the credit rating agencies and fine them

if they breach European Union (EU) legislation. The Credit Rating Agency Regulation

consists of a full list of guidelines including conflicts of interest, barriers to supervisory

authorities, or even non-disclosure of certain information that if broken by the rating agencies

will result in fines (Barroso, 2012).

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1.3 Problem identification and Study Rationale

The global financial meltdown has crippled many economies around the globe. More

precisely, many financial institutions have buckled from underneath the grip of the financial

meltdown. The effects have been large scale and have touched on various aspects of the

economy. Review by technocrats has apportioned a large amount of blame on the Credit

Rating Agencies. To this effect, more focus has been put on the operations of Credit Rating

Agencies by various Securities and market authorities. This shows that many markets are

cognizant of the chief role that the Credit Rating Agencies played in the financial crisis.

It is therefore vital to understand the role that these institutions played in the financial crisis.

This is important in the reform process especially because there is a general consensus that

the reoccurrence of the problem ought to be prevented. As espoused earlier, various market

authorities have embraced the regulation of Credit Rating Agencies (Stolper, 2009). This is a

major shift from the self-regulating agencies that oversaw the miscalculations the lead to the

emergence of the financial crisis. Until now, the literature gap exists in this domain and very

few studies have explored the role and impact of the changes in regulations on rating

agencies to prevent future crisis (Carbone, 2010; Alsakka and Gwilym, 2012). Therefore, this

study will aim to first explore the role of CRAs in the recent financial crisis and then develop

the need for regulations on credit agencies. As a result, a set of recommendations will be

devised to adopt appropriate measures to hinder crisis in the future.

1.4 Study aim and objectives

In order to sufficiently address the issues enshrined in the research topic, the following aims

and objectives ought to be met:

To explore the role played by CRA in financial crisis of 2008

To identify and analyse the need for regulations on credit rating agencies

To investigate changes in regulations on CRA after the financial crisis

To devise a solution what needs to be done to safeguard the economy from a repeat of

the previous mistakes

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1.5 Underlying research questions

In conducting this research, the following research questions will be addressed.

1. What role credit rating agencies played in triggering the financial crisis?

2. What is the impact of regulations on CRA?

3. How the changes in regulations on rating agencies would help prevent a crisis?

4. What needs to be done to safeguard the economy from another financial crisis?

2. LITERATURE REVIEW

2.1 Role of Credit Rating Agencies in the current Financial Crisis

Much has been written about the role of credit rating agencies during the financial crisis. In

capital markets, investors have always depended on the credit rating to access the relative

probability of default of credit securities. Without the Credit Rating Agencies (CRAs), it

would have been impossible for the independent investor to access the credit quality of

international securities. For structured products also, the investors were solely dependent on

CRAs. However, the ratings for structured credit turned out to be far less reliable. Over the

past few years, the credit ratings for structured products have been very unstable and were

more weighed towards downgrades. The volatility of the credit ratings resulted in procyclical

effects and in sabotaging the future stability of credit rating. It is against this milieu that the

need to regulate CRAs has been called for. There are quite a few European reports such as the

Turner report and De Larosiere report, which accounts the flaws in the rating process and the

causes of failure of financial markets (De Larosiere Report 2009).

But, many of the senior managers of CRAs feel that not one of the market participants,

including themselves, could correctly forecasted the seriousness of the financial crisis. And,

that the financial crisis was more or less an exogenous event. The first detailed analysis in the

UK was done when the Financial Stability Forum (FSF) published their report on 7th April

2008. They reported that the one of the reasons that CRAs considerably undervalued the

credit rating was because of methodological shortcomings. The report also criticized deficient

historical data and also the fact that CRAs did not take into account the declining lending

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standards. The report also pointed out that CRA’s should have published verifiable data about

their performance rating.

The report encouraged agencies to disclose this information in a standardized form. It also

suggested that the ratings of structured products and other corporate bonds need to be notable

so that it was easy to identify the different methodology used and also the different risk

characteristics that were involved. The FSF report criticized the CRAs for their inability to

satisfactorily oversee the quality of securitized products. They also called on investors and

supervisors to evaluate if they had been too dependent on the credit ratings (Financial

Stability Forum 2008).

In February 2009, the De Larosiere committee published a report that described several flaws

in the credit rating sector. Senior tranches of structured products like collateralised debt

obligations (CDOs), were given AAA ratings by CRAs, which was the same rating that they

gave to government and corporate bonds. This significantly decreased its perceived credit

risk. The credit risk of these instruments was undermined because of problems in rating

methodologies. The report specifically criticised the lack of sufficient historical data in the

US subprime markets. The CRAs undermined the correlations in defaults that happened

during market downturns. They failed to consider the extensive weakening of underwriting

standards, at least by certain originators. (De Larosiere Report 2009).

In October 2008, Otmar Issing, who was a former chief economist at the European Central

Bank, chaired a committee, which drew up recommendations for the G-20 summit in

Washington. They also had a follow-up summit in London. The Issing Committee report

cited that the CRA failed to address issues such as conflicts of interests amongst national

regulators and supervisors. The report also criticized market participants for influencing the

rating standards for structured products (Issuing Commission Recommendations 2010).

In March 2009, United Kingdom Financial Services Authority published the Turner Review.

Turner Review focused on the role CRAs played in the financial crisis. The model by which

Credit Rating Agencies rated the structured finance products were made transparent to the

issuing investment banks. According to Turner Review, this practice created a form wherein

the issuers started devising specific features to the structured products so that it would pass a

rating barrier. Turner Review also highlighted the increased procyclicality in the system

because of the shift to an increasingly securitized credit intermediation.

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The greater the securitization, the greater was the degree of credit assets that were held by

investors, who were looking at credit ratings as a form of reassurance. This aggravated the

issue of financial institutions using select investment rules, to manipulate the rating (Turner

Review 2009).

2.2 Need for Regulation of Credit Rating Agencies

The proposals for the need to regulate CRAs are not sudden. It has been a regular discussion

point amongst financial analysts and polity since the financial crisis has become a repetitive

occurrence. However, the objective of what the regulations are supposed to achieve is often

vague. The primary reason for this ambiguity is that credit ratings play important roles in the

financial markets. If we consider CRAs as regular companies, then, the focus should be on

the lack of competition in the industry and the inefficiency of their work. But, if we consider

rating-based regulation as the commencement point, then, the focus would be on the Credit

Rating Agencies being able to deliver quality credit rating.

One of the concerns is the conflict of interest of the national regulators and supervisors. It

should also be noted that ratings make it easier to enact legal rights (Gonzalez et al. 2004). If

we take into consideration the financial system as a whole, then, procyclicality of the system

plays an important role. So, the requirements for regulating CRAs have been thoroughly

discussed in academic literature and so, there is no call for looking further into this.

2.3 Changes in Regulation after the Financial Crisis

The changes in regulations particularly after the financial crisis of 2008 are occur due to the

role of CRAs in structured financial product rating which consequently resulted in financial

crisis. After the recent financial crisis, the G20 leaders in April 2009 agreed on exaggerate

the supervision of credit rating agencies in case if their ratings are utilised in regulatory

means; for instance, estimation or computation of a small amount of capital requirements. It

was also decided that local and national market authorities will be accountable to supervise

and put into effect compliance with the IOSCO code. According to IOSCO code “measures

to strengthen the quality of the rating process, ensure subsequent monitoring and timeliness

of ratings, prohibit analysts’ involvement in the design of structured securities, increase

public disclosures, periodically review compensation policies, and differentiate structured

finance ratings from others” (World Bank, 2009, p.5).

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After G20 meeting, the SEC took steps for intensifying the transparency of CRAs by

entailing the discovery of efficiency statistics and also by forbidding actions that potentially

can result in conflict of interest. The regulatory framework for CRAs in the UK and EU was

established and amended in 2009 under the supervision of the Committee of European

Securities Regulators (CESR) (AMF, 2011). Since 2009, it is now necessary for the CRAs to

register with CESR so that their rating performance can be released to public.

The most recent regulatory framework concerned with CRA is the Dodd-Frank Wall Street

Reform and Consumer Protection Act (Miller and Ruane, 2012). The act was established in

July 2010 in the USA responding global financial crisis. Another standard that will contribute

to the regulations on CRA is Basel III by the BCBS which will come into effect between

2013 and 2019.

3. RESEARCH DESIGN AND METHODOLOGY

The research methodology represents a proper way of conducting research using appropriate

research design, approach, and data collection methods (Saunders et al. 2009). This section

contains all necessary information regarding proposed research design and methodology

which will help the researcher to inform how the public viewed the role of credit rating

agencies in the financial crisis?

3.1 Research Approach

The qualitative and quantitative approaches are usually used when conducting research in

social science context. The qualitative approach pursues interpretivism philosophical

paradigm where research is more exploratory, descriptive, and subject nature whereas

quantitative approach follows positivism paradigm where the nature of research is objective

empirical data is collected and analysed using various applicable statistical techniques to test

the hypotheses (Bryman, 2008).

Selecting a research approach is a crucial decision in this research as it is not easy to

determine the true role of credit rating agencies in financial crisis due to the diverse opinions

of experts in this context. The researcher will use qualitative approach to complete this

research. There are various matters that enable the researcher to choose a qualitative

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approach. For example, qualitative research will allow the researcher to address research

questions more deeply by reviewing existing documents and literature on the role of CRAs

and regulations on them before and after the financial crisis of 2008. There are two

fundamental reasons that quantitative approach is not chosen for this study. First, no

empirical data is available about credit rating agencies that can help the researcher to

investigate their negative/positive role in financial crisis. Secondly, this study does not need

to address any hypothesis and therefore, no statistical or other quantitative analysis is

necessary.

3.2 Research Design

According to Creswell (2008), two research designs applicable to social science discipline are

descriptive design and exploratory design. This research will adopt exploratory research as it

mainly follows the qualitative approach. In addition, exploratory design will be chosen

because of the strong need of exploring the role of CRAs which is still unclear due to the

diverse opinions of experts about their contribution in financial crisis. The idea of descriptive

research is dropped because of no need of conducting any experimental work either to prove

hypothesis or to address research questions (Brymen, 2008). Furthermore, this research will

be discrete and flexible in nature and therefore will require achieving research objectives

more openly which descriptive research may not allow (Saunders et al. 2009).

3.3 Research Methods

The research methods are inherent to obtain true knowledge and information about particular

entity or topic in order to develop basic and advanced understanding (Bryman and Bell,

2007). The selection of a suitable research method is significant for the researcher as

inappropriate method can lead falsified results and therefore can have an effect on overall aim

of the research (Creswell, 2008). In order to address the underlying objectives successfully,

the researcher will choose historical research method. The decision of the researcher for

choosing the historical method and dropping scientific method is based on some reasons. For

example, historical method is appropriate for gathering trustworthy and reliable data about

credit rating agencies particularly from secondary sources. In addition, it is not necessary to

acquire additional sources such as special equipment or tools, which can be costly, to conduct

this research (Saunders et al. 2009). The scientific method normally requires laboratory or

field experiments which are not inherently required in this kind of qualitative research.

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3.3.1 Sources of Data Collection

Primary and secondary methods are the two sources from where data can be collected for this

research. A combination of both i.e. triangulation will be used to acquire data to properly

address fundamental aim and objectives of the research. This will enable the researcher to

know the public opinion about the role of credit rating agencies in the financial crisis.

3.3.1.1 Interview as Primary Data Collection Method

The primary data refers to new data or information that is collected by the researcher

him/herself during his/her study (Saunders et al., 2009). As no empirical data is available on

CRAs and regulations on them; so the researcher will collect essential information using 3

face-to-face semi-structured interviews with the professionals work with credit rating

agencies in the UK. Conducting interviews with CRA professionals will enable the researcher

to understand how and when credit rating agencies lead financial crisis. The interviewees will

be chosen and contacted by acquiring their phone numbers and email addresses from the

websites of various credit rating agencies. After that, the interviewees will be contacted via

email first and then by phone to book an appointment for the interviews. Taking interview

appointment will be a real challenge for the researcher as CRA professionals are very busy

and normally are reluctant to entertain interviewers.

The interview questions will be based on key aim and objectives of the research. During the

interview, the attempt will be made to ask both open and close ended questions to justify the

time availability of the CRA professional (Bryman, 2012). The key overarching interview

question will be “How the public viewed the role of credit rating agencies in the financial

crisis?” In addition, some supporting questions during the interview can be asked like this:

How CRAs work?

What is the role of the CRA in securitization?

In your opinion, how CRAs contributed to the worldwide financial crisis?

What precautions are required to prevent such situations in the future in which CRAs inaccurately lead to radical consequences?

Describe the conflict of interest developed when CRAs suggest businesses on improving their credit ratings?

How you analyse the need for regulations on CRAs?

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What is the impact of changes in regulations on CRAs especially after the financial crisis?

Is this true that CRAs are biased towards some specific businesses in particular countries such as USA and UK?

Do CRAs follow any specific model for giving advice to businesses to improve their credit ratings as well as carrying on best business practices?

Any suggestions for improving the contributions of CRAs to stimulate economy rather than triggering financial crisis?

In order to probe into the situation, the interviews will be recorded and in case of recording

restriction handwritten notes will be taken.

3.3.1.2 Secondary Data

The secondary data refers to already processed information by someone (Saunders et al.,

2009). The study will review the literature and data with the aim of offering the critique and

different perspectives. The study will compare and contrast different perspectives from

different scholars. More precisely, the study will look for overarching views from different

scholars and assess for placement and rationale. The study will further critique the rationale

for the overarching views and where possible forms an opinion. The study will also assess for

different ways of analysing the data as done by the scholars in order to compare different

coefficients and their implications.

3.3.2 Research Methods Limitations

As mentioned above that both primary and secondary data collection techniques will be used

throughout this research. Therefore, multiple limitations of both data collection methods will

be applied in this study. During the interview, the discussion may go deeper in one aspect and

the interviewer may lose focus on key points that need to be covered to achieve interview

objectivity (Bryman, 2012). In addition, open-endedness, time consuming, interview biases

for expecting the answers according to expectations are the inherent limitations explained by

a number of researchers such as Saunders et al. (2009), Bryman and Bell (2007) and Bryman

(2012). In relation to secondary data, Denscombe (2010) argues that most of the time the

secondary data is not credible and up-to-date, so researcher may need to be cautious about

collecting data and information from unreliable and unauthenticated secondary sources.

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3.4 Qualitative Analysis

The study will perform a meta-analysis on existing data and literature for relevant studies. In

order to fully meet the objectives of the study, the researcher ought to comprehend the part

that credit rating agencies played during the financial crisis. This will also enhance the

understanding for the need of regulations. Therefore, the study will first seek to understand

the events that led to the financial crisis. To effectively do this, the study will review the

views from different scholars and the history of the financial crisis. The study will sample

and review literature from various scholars on the issue. In more straightforward terms, the

review of the data and literature will centre on the part played by credit rating agencies in the

financial crisis.

The text or recorded interview data will be analysed through ATLAS.ti or Nudist computer

software which allow the researcher to thoroughly analyse qualitative data in an easy and

simple way. This application program can process huge amounts of data in the form of text,

images, audio, or video. The interview data analysis will enable the researcher to compare the

results of interview data with the findings from literature evidences. The flowchart in figure 1

illustrates the research design and methodology of the proposed research.

Figure 1: Research design and methodology

3.5 Population

Sampling is defined by Saunders et al. (2009) as a process of selecting a sample from a given

population. The discussion in whole dissertation will surround Credit Rating Agencies

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(CRAs) operating in the United Kingdom. There are few credit rating agencies registered and

certified in the UK include: Equifax, Callcredit, Experian, AM Best Europe - Rating Services

Ltd, DBRS Ratings Ltd., Fitch Ratings Ltd., Moody's investors services Ltd., Standard and

Poor's Credit Market Services Europe Ltd. The foremost reason of focusing on UK credit

rating agencies is to explore their role in financial crisis at national level.

3.6 Resource Planning and Timetable

The researcher will employ three types of resources such as human resources, computer

resources, and financial resources. The human resources indicate interviewer himself,

interviewee, supervisor, and other people who will assist the researcher during dissertation.

The computer resources specify all inherent data and information retrieved from or stored in

the computer. In addition, it specifies all activities performed using the computer during the

dissertation. Finally, financial resources refer to the expenses that will occur during

dissertation such as travelling and printing etc.

In table 1, the Gantt chart shows all necessary tasks along with their milestones.

Table 1 – Gantt chart

TASKSMILESTONES

1st Mar 10th Mar 20th Mar 31st Mar 10th Apr 15h Apr

Preparation

Literature review

Interviews

Interview analysis

Evaluation and validation

Thesis writing

Thesis review and submission

3.7 Research Ethics

Research ethics are important to consider in every research. Saunders et al. (2009) mentioned

that adopting necessary precautions should be based on three principles of research ethics that

are: (1) obtaining true and trustworthy information, (2) protecting personal information under

data safety and protection act, and (3) using collecting information for the purpose it is

collected for. During this research, the following set of principles will be followed:

The interviews will be held in a friendly manner by giving respect to interviewees

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There will be no pressure on the interviewees to answer each and every question

The interviewer will inform interviewees about the objectives of the research

The interviewees will be asked relevant questions to save their time

The identity and personal details of interviewees will remain anonymous throughout

and after the research

The qualitative data collected through interviews will not be used against any credit

rating agency or any other organisation

3.8 Research Limitations

The research may have two proposed limitations such as:

1. The research findings and conclusion will rely on interview findings and discussion.

So the perceptions and experiences of the interviewees may differ from each. In this

case, it could be hard for the researcher to achieve objectives of the research;

2. Secondly, time could be a limiting factor, because it will not easy to book an

appointment with a professional from CRA with considerable experience

4. CONCLUSION

Referring to the research problem and rational in section 1.3, it is vital to understand the role

that CRA institutions played in the financial crisis. This is a major shift from the self-

regulating agencies that oversaw the miscalculations the lead to the emergence of the

financial crisis. Until now, the literature gap exists in this domain and very few studies have

explored the role CRA in the financial crisis and consequent changes in regulations to prevent

future crisis (Carbone, 2010; Alsakka and Gwilym, 2012). Therefore, this study will aim to

first explore the role of CRAs in the recent financial crisis and then develop the need for

regulations on credit agencies. For this purpose, 3 interviews with professionals working with

CRA will be conducted to investigate the core reasons of financial crisis. It is hoped that

detailed investigation in this regard will allow the researcher to determine what needs to be

done to safeguard the economy from a repeat of the previous mistakes.

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REFERENCES

Alsakka, R. and Gwilym, P. (2012). Rating agencies’ credit signals: an analysis of sovereign watch and outlook. International Review of Financial Analysis, 21, pp. 45-55.

AMF (2011). AMF 2010 report on credit rating agencies. AMF Finance, [online]. Available from: http://www.amf-france.org/documents/general/10146_1.pdf [Accessed: 18 February 2013]

Barroso, J.M. (2012).Commission delegated regulation (EU) No. 946/2012 of 12 July 2012. Official Journal of the European Union, 282, pp. 23-26.

Bryman, A. and Bell, E., (2007). Business Research Methods, 2nd edition, Oxford:Oxford University Press

Bryman, A., (2008). Social Research Methods, 2nd edition. Oxford: Oxford University Press

Bryman, A. (2012). Social Research Methods. 4th edition, Oxford University Press

Carbone, D. (2010). The impact of the Dodd-Frank Act’s Credit Rating Agency reform on public companies. New York: Aspen Publishers, 24(9), pp. 19-24.

Creswell, J.W. (2008). Research design: qualitative, quantitative, and mixed methods approaches. 3rd edition, SAGE Publications

Denscombe, M. (2010). The good research guide: for small-scale social research projects. 4th

edition, Open University Press

Ernest and Young (2012). Dialogue with the Credit Rating Agencies. Tapestry Networks, 30, pp. 1-10.

International Organization of Securities Commissions (IOSCO) (2004). Code of conduct fundamentals for credit rating agencies. [online]. Available from: http://www.iosco.org/library/pubdocs/pdf/IOSCOPD180.pdf [Accessed: 11 February 2013]

Miller, R.S. and Ruane, K.A. (2012). The Dodd-Frank Wall Street Reform and Consumer Protection Act: Title VII, Derivatives. Congressional Research Service, [online]. Available from: http://www.fas.org/sgp/crs/misc/R41398.pdf [Accessed: 18 February 2013]

Saunders, M., Lewis, P. and Thornhill, A. (2009). Research methods for business students.5th edition, England: Pearson Education Limited.

Stolper, A. (2009). Regulation of credit rating agencies. Journal of Banking & Finance, 33(7), pp. 1266-1273.

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World Bank (2009). Credit Rating Agencies. Crisis Response – Note Number 8, [online]. Available at: http://rru.worldbank.org/documents/CrisisResponse/Note8.pdf [Accessed: 20 February 2013]

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