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R. Shyam Khemani, Ritha Khemani, Jan 28, 2014
While the root causes of various financial crises during the past two decades have differed, there have been recurrent questions regarding the possible role played by the Credit Ratings Agencies . Among the concerns that have been raised are: the highly concentrated nature of the credit rating industry, with the leading three CRAs (viz., Moody’s, S&P, and Fitch) accounting for the bulk of the global rating services market; their oligopolistic interdependent and possibly tacit collusive behavior, suggesting lack of effective competition; limited diversity and choice among “globalized” rating agencies; and regulatory and other barriers to entry that entrench the incumbent CRAs. In addition, the failure of the CRAs to properly rate sovereign debt during the Asian financial crisis or, more recently, corporate debt in the case of the Lehman Bros. bankruptcy, and other lapses point to major errors committed by the CRAs.
These errors have led to increased calls for reform and change-such as promoting greater competition, and/or revising the regulations governing CRAs, or even creating new bodies that could perform the function of CRAs-though these calls tend to wane when the financial crisis is over and economic recovery starts taking place. However, it is precisely during the post-crisis period-such as now-that stocktaking and assessment of CRAs should take place, and alternative policies and instruments be explored.
In the ensuing discussion, some of these issues are discussed briefly and a proposal is offered for dealing with the concerns that have been raised. Cognizant of the systemic impact that changes to the current process of credit ratings could have on financial markets, any new approach will need to be put adopted after extensive discussions, consultations, and cooperation with relevant participants in both the private and public sectors. The resulting proposals for change may also have to be gradually phased in.
