Credit companies’ wings clipped
Jinfo Blog

29th April 2009

By Tim Buckley Owen

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Users of credit ratings in the European Union should be in a better position to decide whether they can trust the opinions of their chosen agency, and to what extent those opinions should impact their investment choices, following the approval by both the European Parliament and Council of new regulations to control them (http://digbig.com/4yqrs). Championed by Internal Market & Services Commissioner Charlie McCreevy (http://www.vivavip.com/go/e14019) they mean that agencies that want their credit ratings to be used in the EU must apply for registration and will need to undergo stringent tests relating to conflict of interest, reliability of their methodology and transparency. It was the major agencies’ failure to rate complex financial instruments effectively that brought these new rules about – but they will apparently also apply to more local agencies that simply rate companies. Which makes it an interesting time for company information aggregator OneSource to announce (http://digbig.com/4yqrt) that it is adding UK company ratings from the well established credit reporting company Creditsafe, as a premium add-on to a number of its services. There is of course a world of difference between the rating of companies that actually make or do things in the real economy, as offered by OneSource’s new UK Credit Insights service, and the ‘financial innovation of little social value’ characterised by the Turner Review of global banking regulation (http://www.vivavip.com/go/e17065). Indeed, the new EU regulation specifically distinguishes between the kinds of rating that Creditsafe and its competitors engage in, based on rigorous assessment of variables in a company’s financial report, and the kind that Turner so lambasted. Agencies won’t be allowed to rate financial instruments if they don’t have sufficient quality information to base their ratings on; they must disclose the models, methodologies and key assumptions on which they base their ratings – and, crucially, they must differentiate the ratings of more complex products by adding a specific symbol. It should create clear blue water between these and real company ratings – but you have to wonder whether the regulation mightn’t also have the effect of inducing Creditsafe, Experian, Equifax et al to become more cautious in the company ratings they apply. Meanwhile, though, the ability of the global rating agencies – Fitch, Moody’s and Standard & Poor’s – to bounce back never ceases to astound. Amid some bemusement, the Economist magazine reports (http://digbig.com/4yqrw) that the United States Federal Reserve Bank is insisting on the collateral offered in exchange for its emergency loans being rated only by one of the big three companies – whose ratings contributed so spectacularly to the current global financial mess in the first place.

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