Because Rating Agencies Often Lag Rather Than Lead the Business

question 45

Short Answer

Because rating agencies often lag rather than lead the business cycle, risk weights based on a loan's credit rating may not accurately measure the relative risk exposure of individual borrowers.

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Definitions:

Ingroup/Outgroup Bias

The tendency to favor members of one's own group (the ingroup) over those from different groups (the outgroup), often leading to prejudice and discrimination.

Stereotypes

Over-generalized beliefs about a particular category of people, leading to expectations and judgments without regard to individual differences.

Modern Racism

A form of prejudice that surfaces in subtle ways when it is safe, socially acceptable, and easy to rationalize.

Minimal Group Paradigm

A psychological framework that demonstrates how individuals can exhibit in-group favoritism and out-group discrimination based on the most trivial criteria for group membership.