Resilience in Spite of Controversy: Conditions for Bias in the Credit Rating Industry

Abstract

It has been argued that allegations of bias are baseless, as, if they were true, the reputation-dependent credit rating industry would not have been able to survive. This chapter summarizes a number of controversies that have recently surrounded the big-three CRAs. These controversies have severely tarnished their reputations, but have not threatened their survival. To explain this phenomenon, the chapter examines the nature of the credit rating industry, and presents a number of industry-specific factors that have allowed the reputation-dependent CRAs to be resilient to the controversies surrounding their activities. Whereas these factors by themselves do not constitute proof of biases, they do indicate their possibility. They also refute the argument that reputational capital would preclude the existence of any prolonged perpetuation of biases.