Issues Relating to Credit Rating Agencies

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Understanding the Often-Unsatisfactory Behavior of The Rating Agencies
The evidence that emerges from the analyses can lead, more than understandably, to the formation of a negative concept about the agencies, but above all, they weaken those certainties that lead to consider these organizations, essential for the proper functioning of the market.
The birth of these organizations, moreover, coincides, in time, with the affirmation of the paradigm of informative efficiency within the financial markets, according to which all the relevant information is present within the price of an instrument. The agencies, whose “mission” is precise to improve the dissemination of information, find their affirmation at a time when there is less need for it.
Although it is difficult to deny the validity of these considerations, it would be wrong to take the path of rating downgrading. The reasons for this belief are precisely the reasons that led to the creation of the agencies. While agencies have been set up primarily to address a market failure, their de-empowering would only further worsen the functioning of trade by exposing it to a higher intensity of information asymmetries. What has just been said is true, but only in part. Leaving the current situation of the agencies unchanged and firm as it is, would still be a mistake. The number of inconsistencies inherent in the nature of agencies requiring a regulatory solution is too high. It is possible to continue to justify the enormous influence enjoyed by these organizations, but it is not acceptable for their results to be used to draw up official documents, as long as such conditions of conflict of interest persist.
The main way to relaunch global finance is through changes designed to improve all those defects that agencies seem to have inherently affected, valuing their diversity and, where necessary, subjecting them to careful supervision.
To date, the scenario shows that rating agencies are more concerned about their “very valuable” reputation than about the quality of their ratings. Reputation is seen as a “do-it-yourself” product, which the agencies themselves must take care to create and, later, consolidate. Just thinking about the amount of attention agencies devote to making sure they are trustworthy could be enough to create the doubt that behind that “look” there is actually something to hide. It is a product resulting from the interaction between these organizations and a galaxy of investors absolutely unable to assess their performance.
In the light of the conclusive analyses of this report, the need arises on the part of the legislator to subject Rating Agencies to supervision. This necessary surveillance arises in the wake of the financial crisis that has involved European markets, during which the role of Rating Agencies was strongly criticized. The reflections on European supervision and the subsequent preparatory work on centralizing supervisory functions make appropriate reference to the responsibilities shared between the European Supervisory Authority and the national authorities through the adoption of Regulation (EC) No 1060/2009 , which greatly facilitates the centralization process.
A brief and essential mention must be made about the Unified Financial Act that has been delegated, with the insertion of art. 4 bis, only with art. 1 of Legislative Decree no. 176 of 5 October 2012, aimed at identifying within the CONSOB supervisory body responsible for the application of the provisions of the same Regulation.
What appears to be the key element derives from the fact that with art. 4 of Regulation no 1060/2009 it is provided that for regulatory purposes intermediaries may only use credit ratings issued by credit rating agencies established in the Community and registered in accordance with that Regulation.
Ratings are therefore used throughout the Union, with equal value in the various jurisdictions, for all intermediaries with the so-called European passport; maintaining a decentralized and two-tier system does not seem to be the most appropriate and effective way of ensuring the effectiveness of supervisory intervention in the internal market (Regulation No 513/2011, introductory part, paragraph 8).
The regulatory value assigned to ratings issued by duly registered agencies enhances the gatekeeping function in accessing the financial markets of the agencies’ activities, justifying public oversight interventions, which are all the more effective, as they are centralized within the same institution.
The hope, therefore, is that a phase will begin in which the credibility of the agencies will be sworn up by the investors themselves, with full knowledge of the facts, with the help of specially appointed organizations. In such a situation, market players themselves would be able to recognize the merits of different agencies, relieving them of the heavy burden of maintaining a high reputation.
Marco Barchetti
Fintech Review

Issues Relating to Credit Rating Agencies
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