CREDIT RATINGS

Credit ratings are just one of the benchmarks of banking and fund management industrial standards. They are a good attempt to protect against potentially wayward performance in the financial markets, but they represent only one technique. They provide a short single figure or code e.g. AA, B
The research figures distilled into one succinct summary may be fine for a university, but it can be dangerous when looking deeply into market investments. Risk management systems embody the knowledge or assumptions of industrial best-practice norms that have been built up over the years. Thus, the up-to-date credit rating of counter-party firms are essentially a reactive move to risk-monitor companies, quite possibly using data that might be up to 12 months old. Also, bank decision makers may take the individual ratings and amalgamate them, thus losing data accuracy or granularity. This introduces risk of its own.
There are real dangers about using credit ratings as a proxy for full-scale risk management, of which due diligence is just one tool. When the ratings are up to date and accurate, they work well in defining an extent of risk attached to a company or investment. If not, they can fail you. Credit-rating agencies used in the risk management exercise can be late or irrelevant where the search is done post facto, i.e. the decision has essentially been made and all that is needed is a rubber stamp. The process of estimating the risk from past data reflects the subjectivity of credit ratings published. Where balance sheets and similar audit data are used, we are imposing two layers of subjectivity. This error is increased where the published information is out of date. Thus, you have distilled a mass of complex (and sometimes dubious data) into one single figure or grade. This sifting process can have inherent faults at play to provide a misleading result.