ibps-so 2018 · Question 109 of 356

Written in haste and never once checked against the ledger, the note was returned to the branch with a direction that it be recast.

1. Athe branch was directed to recast it
2. Breturning it to the branch
3. Cit was returned by the branch
4. Dthe note were returned
5. ENo improvement required Directions (Q36–Q43) : The passage that follows is taken from an address delivered to a gathering of treasury and risk o cers upon the question why the opinions of credit rating agencies are paid for by the very borrowers they concern. Read the passage with care and answer the questions that follow it. Certain words have been printed in bold in order to help you to locate them while answering some of the questions. A credit rating is an opinion about the likelihood that a borrower will pay what he has promised to pay. It is published free of charge, and that single fact is the source of most of what is unsatisfactory in the business. The agency that forms the opinion is paid not by the investor who relies upon it but by the issuer whose paper it grades – an arrangement that would be thought scandalous in almost any other department of professional judgement, and that has nevertheless outlived every serious attempt to reform it. The defence commonly o ered is that the arrangement is unavoidable. An opinion, once published, cannot be kept from those who have not paid for it; a subscriber may pass it on, and an agency that tried to live upon subscriptions alone would nd its product circulating freely while its revenue did not. The issuer, by contrast, cannot escape the fee, because without a rating his paper will not be bought by the institutions whose own rules oblige them to hold nothing that has not been graded. The model is therefore presented as a concession to the economics of information rather than as a lapse of integrity. There is something in the argument, though less than its advocates suppose. A con ict of interest is not disposed of by showing it to be convenient. What is supposed to restrain the agency is its reputation, which is its only asset and which a run of bad opinions would destroy; and reputation does restrain it, but slowly, and the slowness is precisely what matters. An agency may be too sanguine about a whole class of securities for the better part of a decade before the reckoning arrives, and by the time it arrives the fees have been collected and the losses have been taken by somebody else. The graver di culty, however, is not that ratings are bought but that they are believed to say more than they do. A rating speaks to one hazard only, the failure of the borrower to pay. It says nothing about the price the paper will fetch tomorrow, nothing about the ease with which it may be sold, and nothing at all about the behaviour of a market in which every holder is holding the same instrument for the same reason. Regulation then compounded the error by writing the ratings into law. Once a supervisor requires a fund to hold securities of a stated grade, the grade ceases to be an opinion that may be weighed and becomes a licence that must be obtained; and the ordinary discipline by which a discredited opinion loses its audience is suspended, since the audience is now compelled by statute to attend. The remedies proposed have generally been modest, and they have had to be. Rotating the agencies among issuers, as auditors are sometimes rotated, would redistribute the fees without altering who pays them. Requiring the investor to pay would be admirable if it could be arranged, and it cannot. Stripping the ratings out of the rule-books is the one reform with a plain logic behind it, and it has been pursued half-heartedly, because the supervisor who removes the rating must put something in its place, and what he puts there will be his own judgement, for which he, unlike the agency, can be called to account. What survives of the case for the agencies is unglamorous and probably true. They gather and compress information that most investors would never gather for themselves, and a compressed opinion of uncertain quality is worth more than no opinion at all – provided that nobody mistakes it for a guarantee.Correct