Credit ratings fail to accurately measure capital adequacy, risking financial stability.
Credit ratings may not accurately reflect a company's financial health during economic downturns. A study compared credit ratings with market indicators like credit default swaps and asset values to measure credit risk for US firms before and after the Global Financial Crisis. The research found that market-based measures showed a higher increase in credit risk compared to credit ratings. This suggests that banks may need larger capital buffers to handle potential financial risks than what credit ratings indicate.
