Regulators promise a belated review of the ratings oligopoly

Rating agencies Exclusion zone Feb 6th 2003 From The Economist print edition Regulators promise a belated review of the ratings oligopoly THE domination of any industry by three firms ought to set regulators thinking. Does their power distort markets? Is lack of competition damaging? So it is in the world of credit ratings, where two big agencies, Moody's and Standard & Poor's (S&P), and one smaller one, Fitch, hold sway. The Securities and Exchange Commission (SEC) was asked by Congress last year to review their role. At the end of March the SEC will publish a paper that attempts to deal with concerns not only about competition in the rating business, but also about possible conflicts of interest, and the need for greater transparency and perhaps tighter regulation. Don't hold your breath. The world is awaiting the SEC's conclusions from a similar initiative begun in 1997. If there is a lack of competition, the SEC is largely to blame. Only the three top agencies enjoy the status of “nationally recognized statistical rating organization” (NRSRO), awarded by the commission. Some others have applied in vain, because the SEC will not divulge the criteria for election to this exclusive club. Since 1975, when NRSRO status was invented, the chosen few have thrived in their protected market—and taken over any newcomers that achieved NRSRO status. The use and abuse of ratings Just as troubling is the increasing use of ratings, not just to appraise securities but also as a motive for their creation and marketing. Nowhere is that truer than in so-called structured products—bundles of assets sliced into different layers of expected risk and return. The selection and slicing are done in close discussion with a rating agency, so that each slice is awarded the appropriate rating. Then the slices are sold to investors with appetites for each grade. Even some market participants agree that this is putting the cart before the horse. Assets tend to be selected to conform with agencies' credit ratings and measures of diversification. The trouble is that ratings, which in S&P's terminology range from AAA to BBB- (for investment-grade credits) and below that from BB+ to D (for default) are not as finely graded as market judgments of creditworthiness. Of two credits rated B, one could be a healthy company; the other could be close to default. Ratings are a handy benchmark for the buy-and-hold investor, but not necessarily for the trader who has to react to the market mood. Unfortunately, by accident rather than by sinister design, ratings have become a driver for trading as well as investing in the capital markets. The SEC has a responsibility, not just in America, to get its next steps right, because the big three's ratings cover the globe. It has already examined and rejected the solution of abolishing NRSRO status but said last month that it would explore “viable alternatives”. Regulators “should not be scared” of opening ratings totally to competition and accepting that agencies make mistakes, says a director of one recognized agency. If ratings became just another feature of the market, fears of distortion and a lack of competition should diminish. Discussion Questions: (1) What is your opinion on the fact that these rating agencies graded down the Korean economy due to the North Korean factor? (2) What impacts on the Korean economy has been made? (3) Do you think these ratings are fair and well eval‎uated? (4) What is their major role in international economy? ============================================ ▷◁ 대구지하철 희생자를 추모합니다!