What Are the Limitations of Relying Solely on Credit Ratings for Risk Management?

Relying solely on credit ratings has several limitations: they are backward-looking, slow to react to sudden market changes, and often exhibit procyclicality. They also represent a generalized default probability, not the specific exposure risk to a firm.

The 2008 crisis demonstrated that ratings can fail simultaneously, necessitating more dynamic, real-time risk measures like mark-to-market exposure.