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BackRecently, biting remarks of EU Commissioners Reding and Barnier directed at credit rating agencies made people sit up and take notice. The criticism refers in particular to the dubious conduct of the agencies against the background of the European rescue packages.
"One of the weaknesses of the financial system is that it relies too much on ratings"
With this statement in the French newspaper La Tribune, Commissioner Barnier referred to an essential problem, which governments, putting together their aid programmes, are currently confronted with. Based on legal grounds, many fund managers have no choice but investing the money of their investors solely in investment vehicles with the highest level of credit ratings. The downgrading by rating agencies, which is currently happening, would lead to automatic, large scale, sales, without funds managers making any effort to check the actual risks themselves. That is why EU Commissioner Barnier announced the intention to limit above all the impact of ratings.
“Europe must not let three US private companies to ruin itself.”
These marked words by Justice Commissioner Viviane Reding in an interview with the German newspaper Die Welt refer to the ownership structure of rating agencies. The two largest rating agencies, Standard and Poor’s (S&P) and Moody‘s Investors (Moody’s) have a market share of 40 % each. In both corporations the majority of shares is owned by US investors, who, as a result, dominate 80 % of the international rating market. Together with Fitch, who has about 10 % of the market share and conducts most of its business in the USA, the agencies form an oligopoly. Hence, when it comes to ratings, the in other sectors often advocated competition is simply a myth. Reding is therefore proposing to break up the agencies or to promote rivalling European or Asian companies.
Background – What does the daily business of a rating agency look like?
Rating agencies evaluate the credit worthiness of debtors, i.e. they make statements on the financial soundness of companies and also, as in the case of Greece, of states. Normally, companies themselves instruct the agencies to conduct a rating. However, in most cases ratings of states, such as Greece, Ireland or Portugal are carried out and made public by rating agencies under their own initiative. Preparing ratings for companies is a very lucrative business for companies. Hence, S & P alone has an annual turnover of between 2 and 2.5 billion Dollar.
The image of rating agencies has particularly suffered in the run-up to the financial crisis.
In consulting Investmentbanks how to bundle mortgage loans, they made a fortune. Adding to that, they gave the resulting financial vehicles, which turned out to be junk, best ratings
Rating agencies like to emphasise the “scientific method and rationality“ of their verdicts; an argument, which is difficult to follow from an outsider’s perspective as the exact methods how they arrive at their ratings remain a closely guarded secret.
Further Information:
Interview with Commissioner Barnier in La Tribune (French only)
Informative article of the Financial Times Deutschland on the subject of rating agencies (German only)
With this statement in the French newspaper La Tribune, Commissioner Barnier referred to an essential problem, which governments, putting together their aid programmes, are currently confronted with. Based on legal grounds, many fund managers have no choice but investing the money of their investors solely in investment vehicles with the highest level of credit ratings. The downgrading by rating agencies, which is currently happening, would lead to automatic, large scale, sales, without funds managers making any effort to check the actual risks themselves. That is why EU Commissioner Barnier announced the intention to limit above all the impact of ratings.
“Europe must not let three US private companies to ruin itself.”
These marked words by Justice Commissioner Viviane Reding in an interview with the German newspaper Die Welt refer to the ownership structure of rating agencies. The two largest rating agencies, Standard and Poor’s (S&P) and Moody‘s Investors (Moody’s) have a market share of 40 % each. In both corporations the majority of shares is owned by US investors, who, as a result, dominate 80 % of the international rating market. Together with Fitch, who has about 10 % of the market share and conducts most of its business in the USA, the agencies form an oligopoly. Hence, when it comes to ratings, the in other sectors often advocated competition is simply a myth. Reding is therefore proposing to break up the agencies or to promote rivalling European or Asian companies.
Background – What does the daily business of a rating agency look like?
Rating agencies evaluate the credit worthiness of debtors, i.e. they make statements on the financial soundness of companies and also, as in the case of Greece, of states. Normally, companies themselves instruct the agencies to conduct a rating. However, in most cases ratings of states, such as Greece, Ireland or Portugal are carried out and made public by rating agencies under their own initiative. Preparing ratings for companies is a very lucrative business for companies. Hence, S & P alone has an annual turnover of between 2 and 2.5 billion Dollar.
The image of rating agencies has particularly suffered in the run-up to the financial crisis.
In consulting Investmentbanks how to bundle mortgage loans, they made a fortune. Adding to that, they gave the resulting financial vehicles, which turned out to be junk, best ratings
Rating agencies like to emphasise the “scientific method and rationality“ of their verdicts; an argument, which is difficult to follow from an outsider’s perspective as the exact methods how they arrive at their ratings remain a closely guarded secret.
Further Information:
Interview with Commissioner Barnier in La Tribune (French only)
Informative article of the Financial Times Deutschland on the subject of rating agencies (German only)