In today’s very short post, an article in Global Capital is reviewed in relation to a recent post here in Financial Regulation Matters concerning the European Central Bank’s decision to accept now-junk status bonds as collateral. The article, published in yesterday’s edition of Global Capital , is entitled ‘ The ECB is now Europe’s foremost rating agency ’, and is based on the premise that the ECB’s decision has fundamentally altered the credit rating market in Europe. This is because ‘if the ECB thinks it’s good enough to buy or hold as collateral, then it probably is’. Furthermore, the article argues that ‘a credit opinion from the ECB is invariably going to be more accurate and more timely, given that the opinion will itself have a direct bearing on credit quality’. Finally, the article cites S&P’s decision not to downgrade Italy as evidence of this power shift towards the ECB and away from the rating agencies. However, if we return to last Thursday’s post, then we...

Today’s post reacts to the interesting article published recently in the Bond Buyer , entitled ‘ How the coronavirus is impacting perceptions of municipal credit, ratings ’. The article raises some very interesting points regarding the usefulness of credit ratings in the ‘muni’ marketplace, and also the impact that regulations on the disclosure and following of public methodologies may be having upon the position of the agencies. ‘Municipal bonds’ are simply bonds issues by a state, municipality, or county in order to finance any of its capital expenditure; this is similar to the process of generating sovereign bonds for countries, for example. However, with a number of major US muni issuers being hit with rating downgrades recently – including Illinois, New York, New Jersey, Connecticut, and the New York Metropolitan Transportation Authority – there are questions being raised as to how valuable these downgrades actually are. That concept is based on the understanding that a. t...

The European Sovereign debt crisis , which engulfed the EU after the Financial Crisis, left an indelible mark on the structure and mentality of those charged with leading the bloc. Now, as the bloc faces yet another crisis in the form of the COVID-19 pandemic, it appears that the leaders of the EU and, in particular the ECB (European Central Bank), have learned their lessons from 2012 and are taking proactive actions against the coming wave of downgrades. However, have they really learned their lesson? Also, what are the risks that the EU is opening itself up to, financially, as well as politically? In this post we will review the unscheduled announcement recently by the ECB that it will now be accepting the bonds of so-called ‘fallen angels’ as collateral . It is being widely reported in today’s business press that the ECB will, as long as a so-called ‘fallen angel’ was deemed investment-grade on and before the 7 th April and that they remain as BB-rated (or the equivalent), a...

At the end of last year we reviewed Moody’s decision to downgrade Ford to ‘junk’ status here , but in the current crisis it is not surprising to hear that the wider industry is coming under increased pressure. With that pressure, naturally, comes to the threat of being downgraded by the leading credit rating agencies. As the downgrade wave turns its attention to the automotive sector, we will review these credit actions and also how the industry is attempting to recover. Although Ford’s downgrade came before the onset of the COVID-19 pandemic, a number of other automotive manufacturers were in a precarious position with regards to their credit status. Like a number of other prospective so-called ‘ fallen angels ’ – a term used to describe the bonds of an entity that were once investment-grade but that have now fallen past that category – there are, and were a number of very recognisable companies that are teetering on the edge of investment grade. Credit analysts have been wa...

The case that the Serious Fraud Office (SFO) brought against a number of Barclays bankers for the deal reached with Qatar at the height of the Crisis has been reviewed before here in Financial Regulation Matters and across the financial press. However, now that case has concluded with the three bankers who were prosecuted being acquitted by the courts, one of those bankers – Richard Boath – has decided to speak out about his experience and is arguing that the SFO should have its powers seriously reviewed. In this post we will look at these arguments and look at some of the consequences of taking action in this regard, and of continuing the course. The high-profile fraud case dominated the financial press once the SFO brought charges against the three bankers – Richard Boath, Roger Jenkins, and Tom Kalaris. The five-month trial concluded with the jury returning after five hours to find all the defendants not guilty on all counts . The SFO had begun to experience criticism from...

During the Sovereign Debt Crisis in Europe in 2010/12, the idea of monitoring the credit rating agencies’ timeliness of ratings came to the fore. Since then, the EU has been pushing for more impactful regulatory endeavours in the credit rating arena, with many missing the mark. Yesterday, the ESMA Chief Steven Maijoor turned his attention to the issue of procyclicality again as the CRAs being to downgrade a number of countries, with a number of others teetering between investment and non-investment grade status. Maijoor started by stating that ‘ the timing of ratings actions needs to be carefully calibrated ’. This is because of the fear that procyclicality will be rearing its head once more, just like it did a decade ago. The concept of procyclicality is described as when credit ratings ‘ are stricter during an economic downturn than in an expansion ’. Scholars have discussed how, in good times, the ratings tend to be ‘ inflated ’ but that when the market turns, the ‘massive’ r...

In continuing the new approach of providing small updates on the credit rating industry here in financial regulation matters , today’s brief post assesses the recent announcements by both Fitch and S&P regarding the sovereign rating of the United States. Just before last week’s downgrading of the UK’s credit rating, as we covered here Fitch had, on the 26 th March, affirmed the US’ credit rating as AAA, with a stable outlook . Despite warning that the coronavirus pandemic was inflicting an unprecedented shock on the market, Fitch believes that both a. the country is deploying adequate resources (financially, at least) as part of its $2T stimulus package, and that b. as long as the pandemic clears before 2021, the agency expects the drop in GDP to reverse sharply and bounce back. All of the agency’s analysis is caveated by the development and potential continuation of the pandemic, naturally. Yesterday S&P followed suit, affirming the US credit rating as AA+ , with a s...

The COVID-19 pandemic has created a global scene that is producing some incredible reactions. One of which is the level of state-backed intervention that is occurring in the UK and US, with the respective Conservative and Republican governments announcing record financial packages. However, as part of that intervention, we are starting to see elements of state intervention in private business that is not being received well by the market. In this post, we shall examine the Bank of England’s decision, as part of its role as the British regulatory framework’s top supervisor, to apply pressure to banks to cancel dividends. For HSBC, and its structure, this has proven to be a particular issue. It was reported recently that a number of the UK’s largest banks had received pressure from the Prudential Regulation Authority, the regulatory arm of the Bank of England, to halt their dividends ‘ after they were warned against paying out billions of pounds to shareholders during the coronavi...

In doing something slightly different for financial regulation matters , this post is just a small update for those connected or interested in the credit rating industry. The EU, on the 30 th March, has published a call for comments on the availability and use of credit rating information and related data. As stated on the ESMA’s website, ‘ the purpose of this call for evidence is to gather information on the specific uses of credit ratings as well as how the users of credit ratings are currently accessing this information ’. This reflects an alteration in regulatory direction that a number of entities have been calling for – instead of just focusing on the rating agencies and mis-regulating because of a lack of scope, a greater focus needs to be placed on the users of credit ratings. This call for information is the EU’s attempt to start that process. I am reminded of my own journey in which the scholarly literature is massively negative regarding the credit rating industry and it...