Following the recent approval by the European Securities and Markets Authority (ESMA) that allows the four largest ratings agencies to continue rating countries, GreySpark comments on the role of the agencies in a changing financial marketplace.
The recent demise of MF Global has also brought attention towards ratings agencies, with experts debating whether its collapse was accelerated by the downgrade issued by Fitch and Moody.
The 2008 economic crisis saw ratings agencies fall under scrutiny, as experts partly blamed the crisis on the fact that data being fed to market participants was not completely reflective of the risk involved in financial institutions, instruments and countries.
GreySpark maintains that rating risk is something that should be managed by companies by factoring them into risk models. It isn’t the role of the agencies to soften the blow to a failing institution. While the ratings agencies lost credibility after the crisis, now there are some governments that are hostages to these organisations, with the agencies having a direct effect on banks.
The other controversial proposal by ESMA relates to regularly changing the agency that rates issuances. GreySpark feels that this would be a positive change since it would introduce competition, which the industry has lacked given that it has been dominated by a small oligopoly of agencies. The idea of introducing new process of rating is good, despite a convergence in the various methodologies that the agencies employ.