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Diversity in Credit Ratings and Opinions is Hard to Achieve

There is a European effort underway to reduce the high level of concentration in the credit rating industry.  This however is easier said than done.   The Chairman of DBRS (Canadian Bond Rating Agency) writes in a recent commentary to the Financial Times:  “The newly implemented regulatory framework for rating agencies in Europe allows for the establishment of new entrants; however, the costs associated with navigating this process are very significant.  In our case, the registration process took 13 months, required an application exceeding 2,000 pages and, most importantly, required a fully staffed office consisting of local management, rating analysts, credit policy analysts and compliance officers before our application would be considered.”

Starting a credit rating agency from scratch is a tedious task and will not be effective until the new entrant has accumulated significant critical mass in historical data, expertise and an excellent track record in predicting defaults.  This takes years to accomplish, hence investors and regulators have to get used to the fact that the three largest players will enjoy the proverbial high ground for some time.

The quickest way to pave the way for new competition is to do away with the regulation altogether.  Rather than honing in on rating agencies the focus should be on the issuers and their auditors.  Let the market decide which rating agencies are more effective than others. 

Source: Financial Times and BIIA Commentary

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