Credit rating - complexity on complexity
Jinfo Blog

By Tim Buckley Owen

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In a remarkable reversal of fortunes, sovereign ratings agencies have seen their revenues shaved while those of commercial credit reporting services have grown. Meanwhile as European authorities turn up the regulatory heat on the sovereigns, one commentator suggests that their data just isn’t big enough.

“What a difference three months make”, suggests a Business Information Industries Association (BIIA) blogger. A 30% increase in Moody’s Ratings Services revenue in the second quarter has been converted to a 2% decline year-on-year in the third, and Standard & Poor’s Rating Service has changed from an 18% increase to a 1% drop.

Meanwhile commercial credit reporting agencies Equifax, Experian and Dun & Bradstreet have enjoyed recent revenue growth of 8%, 9% and 10% respectively. More results details here for Moody’s, McGraw-Hill (including Standard & Poor’s), Equifax (follow links to 26 October), Experian (for year end 31 March) and Dun & Bradstreet – and earlier LiveWire comment here.

Moody’s and S&P’s analytics services, on the other hand, did see double digit growth over the quarter, leading the BIIA to observe that the established players’ ability to put Big Data to good use was an advantage that “upstarts” (such as Bloomberg, Kroll and Rapid Ratings, presumably) couldn’t match for some time. So where does that leave the sovereign ratings business and why should information managers be concerned?

According to documents seen by the Financial Times, the European Union is minded to give regulators powers to suspend credit ratings of countries undergoing bail-outs, force issuers of financial products to change their agencies regularly to avoid conflicts of interest, and allow the European Securities & Markets Authority to approve ratings methods and ban sovereign ratings in “exceptional circumstances”. It would “deal a blow to the business models of the big three agencies” (Fitch as well as Moody’s and S&P), the FT suggests – but perhaps they are fatally compromised already.

Writing recently in Forbes magazine, Yuval Bar-Or suggested that sovereign ratings produced by the Big Three were “neither especially accurate nor responsive enough to justify their persistent prominence and influence”. They were often stale, he continued, and failed to function as an early warning device.

Crucially, though, their accuracy was undermined by data scarcity and associated modelling limitations, concerns about falsified data, and open questions about whether the relatively few rating analysts could properly cover such tremendously complex entities. “Their influence should be cut back significantly through the nurturing of alternatives,” he concluded.

What should those alternatives be? Inconceivable that vastly improved analytics based on Big Data won’t be involved – analytics of a kind that the commercial credit information companies are already beginning to exploit. The turmoil in this complex market is likely to continue for some time yet.

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