Monday, 27 February 2017

The International Non-Profit Credit Rating Agency: An Attempt to Inject Some Responsibility

This short post is concerned with the attempt by a non-profit organisation to inject some much needed responsibility and care into the credit rating industry. Based on a published article that is available here in its final form in The Company Lawyer, and here in its pre-published and different form, this post will look at the International Non-Profit Credit Rating Agency (hereafter INCRA) and its aims, as well as some of its shortfalls. Ultimately, it is concluded that whilst the endeavour is incredibly worthy and should be praised, the environment is skewed against newcomers to the rating marketplace, and especially those trying to reduce the impact of the venal 'Big Two' – Moody’s, and Standard & Poor’s.

INCRA was initially developed by the Bertelsmann Foundation in 2011, organically as a result of its research into the quality of nation states’ quality of governance via its Transformation Index. As such, the newly-imagined rating agency set its sights on analysing the creditworthiness of sovereign states, but by different methods to those utilised by the established rating agencies. We have already seen in Financial Regulation Matters that the issue of creditworthiness in the sovereign debt market is of pressing concern, with yesterday’s post discussing the potential disaster that may be looming if one of the constituent ‘dominoes’ falls i.e. Greece, Spain, or any other E.U. country that is financially on the brink. The fundamental call of INCRA is that a more comprehensive set of indicators and tools for research are required, so that the long-term socioeconomic and political aspects are further embedded into the rating process, far more than they are now. This difference is repeated throughout the fabric of the agency, particularly in terms of how it hopes to be financed; rather than submitting to the conflict-of-interest that is at the heart of the current failings of the ratings industry – the issuer-pays conflict – INCRA aims to be funded by a number of concerned but ultimately independent bodies, like the IMF and the G20.

More detail can be found on INCRA in the article and online. The issues facing the prospective agency however are great. The issue of funding is a major hurdle, because the prospective $400 million required is a) unlikely to be garnered from nation states who have their aims to influence the process, as will be discussed in a future post based upon a recently published article by this author, available in a pre-published and different form here and in its final form here, and b) the prevalence of the Big Three rating agencies mean that supplying an alternative is not likely to succeed. The article goes onto to suggest that the agency needs to merge with another endeavour that is concerned with rating in the correct way, the Credit Research Initiative, and that they should take advantage of a gap in the regulations so that the imagined merger would serve as a ‘check’ on the actions of the Big Three, free from any perceived conflicts of interest.

Ultimately, the issue is clear to see – the Big Two rating agencies in particular are engrained into the fabric of the economy. According to a work in progress by this author, available here, the credit rating agencies have been jostling for position throughout their history and the current era represents their most successful yet. As such, worthwhile and humanistic-based endeavours rarely get off the ground because of the might and the interwoven nature of the established order. However, rather than be disheartened, it is important that such endeavours are supported, amended as appropriate to meet the task ahead of them, and are ultimately put in a position to question the established order and provide clear-cut evidence of its failures – clear-cut evidence of its failures was abundant after the Financial Crisis, but unfortunately time washed away the disdain that should be directed towards the agencies; these endeavours can help return the spotlight to these agencies that were, and may be again at the heart of a financial crisis.

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