According to the thought of Himan Minsky, an American economist belonging to the Keinian doctrine, who died in 1996, in periods of expansion, when the cash flow of the enterprises exceeds the quota necessary to pay the debts, a speculative euphoria develops.
At the origin of the crises there is a displacement, that is, a “shift-off”, which would be nothing more than an external event with respect to the macroeconomic system, which pushes the subjects to believe that there will be strong increases in the value of the assets (be they real or financial).
This results in credit expansion, which further fuels euphoria. As soon as one realizes that the expansion of prices is over, the race to sell begins, which can lead to panic on the markets, and also to negative effects on the real economy.
The start of the contraction is typically triggered by higher interest rates, which became necessary in response to the overheating of the economy, accompanied by a reversal of expectations from optimistic to pessimistic.
In the financial sector, risk assessments become pessimistic and, as a result, the supply of credit contracts well beyond the level of demand.
But what role do Rating Agencies play in this mechanism?
Certainly, the Agencies are fundamental in confirming or not the prevailing expectations in the economic system and can, therefore, in Minsky’s view, contribute to the accumulation of financial imbalances if they validate the excessively exuberant expectations.
To conclude, if they do not operate with adequate timing, the Rating Agencies can be primary actors in favoring the accumulation of financial imbalances in the expansion phase, contributing to the increase in the indebtedness of operators with a speculative vocation.
The three most established Rating Agencies in the current historical moment, namely MOODY’S, FITCH and STANDARD & POOR’S, as already mentioned, have ended up in the dock because they are often held responsible (even if not completely) for the American financial crisis originated by sub-prime mortgages as well as for the current sovereign debt crisis in European countries.
The many allegations range from mis-valuations of market-based instruments to conflicts of interest that compromise independent judgment.
Hence a heated debate on whether or not to maintain the current system and/or to refine it by means of shared regulatory agreements.
In Europe, in 2009 a regulation was approved, which imposes an obligation on Rating Agencies to comply with strict rules to reduce possible conflicts of interest and ensure the quality, independence, and transparency of their opinions.
Moreover, in 2011 the Rating Agencies were subject to the supervision of the European Securities and Markets Authority (ESMA) and the European Parliament called for regulatory consolidation and for measures to be taken to reduce the risk of the market being overly subject to ratings.
At the international level, in 2010, the Financial Stability Board identified a series of principles aimed at reducing the degree of confidence of authorities and financial markets in agencies, replacing ratings with suitable alternative standards, where available.
These principles were endorsed by the G20 summit in Seoul in November 2010.
Finally, in recent months, a draft regulation has been discussed at European level, which provides for:
• The obligation for an issuer relying on the rating to periodically rotate, after a certain number of years, the rating agency valuing its debt;
• The introduction of the personal responsibility of analysts who carry out the assessments leading to the assignment of a given rating. These proposals are rather radical and would have a considerable impact on the sector and on the structure of the market.
In conclusion, the Rating Agencies have been the subject of much criticism and particular attention from regulatory authorities in recent years.
There is no doubt that there are some important problems in the sector and that these need to be addressed effectively and efficiently.
The regulations introduced at European level have so far properly addressed these problems, and represent a very important step in the effort to overcome the criticalities identified with the aim of imposing on the Agencies the respect for the fundamental principles of rigor, transparency, and independence.