We have analysed the issue of domestic credit rating provision within China on a number of occasions here in Financial Regulation Matters . Today one of my articles was published in The Journal of Business Law (available here , and here in a pre-published version) that analyses the trajectory of rating provision within the country. We have also looked at the situation from the view of the political and geo-political ambitions of China here , and from the viewpoint of the leading US-based rating agencies here . In today’s post, we will look at evidence that demonstrates the problem at hand, and why China has now become so open to having the US-based rating agencies operating within its territory, on their own, for the first time.   It has been reported this morning that domestic Chinese rating agencies are providing for massive upgrades in their ratings for ‘local government financing vehicles’ (LGFV), despite the impacts of the Covid-10 pandemic still playing out. The article in

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

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 today’s post we will look at recent calls for more action in the field of credit rating reform, and also some solutions that have been advanced by commentators from the field – our friends at the Expect[ed] Loss blog in particular. Recent calls from the Senate have reignited the discussion and debate regarding credit rating reform, but there are potentially much more deep-rooted questions that need to be asked. As reported last week by Cezary Podkul of The Wall Street Journal , a number of Congressmen have taken the option of pressing the SEC on why more has not been done regarding the inherent conflicts of interests that plague the credit rating marketplace . This is not the first time that this request has been made of the SEC, with a number of academics and former practitioners urging the SEC in November 2019 to ‘ finally end the industry’s “issuer pays” business model ’. The panel, however, did not promote an alternative model, and industry-insiders have been staunch def

It has been reported recently that Morningstar, a credit rating agency, is attempting to move into the rating market for digital assets. Whilst the article breaking this news contains a number of issues, it does raise an interesting point regarding a. the rating of digital assets, and b. whether the credit rating industry is ready to move into that particular marketplace. In this post we will assess the lead article, and discuss some other elements within this particular field. The article in Brave New Bitcoin starts off on a worrying footing right out of the gate, announcing that ‘Morningstar Credit Ratings launched in 2016… despite only being in the market for three years the financial services company managed to generate over $1 billion revenue in 2018’. We can dismiss this error as we know that, in 1984 Joe Mansueto founded the agency in Chicago . The article has mistaken Morningstar’s receiving of permission to rate corporate bonds in 2016 as the beginning of it as an agen

Today’s post previews a forthcoming article by this author that is due to be published in the Journal of Business Law . The article is available in its pre-published format here . The aim of the article is to assess the new development within the global credit rating arena, in that China has allowed Standard & Poor’s entry, as a stand-alone entity, into its marketplace for the very first time. The move to allow the largest global credit rating agency into the Chinese market , without having to be aligned to a domestic agency, is unprecedented. Considering that Moody’s has apparently set up a stand-alone entity and is in the process of applying for the licence to operate within China, the article discusses the environment that the agencies are entering, whether there is a need for them at all, and if so then why. The article starts by analysing the development of the credit markets in China, which naturally leads to the development of the internal credit rating market. Throug

In this short post, we will review the news from a couple of weeks ago that Fitch Ratings, the third member of the Credit Rating Agency oligopoly, has been fined by the European Securities and Markets Authority (ESMA) for breaching its conflict of interest-related rules, specifically with regards to its ownership. Fitch Ratings is the third member of the rating oligopoly and, like S&P is not a public company. Therefore, its ownership structure is a little more opaque and difficult to accurately determine. We know that the firm is owned by the influential Hearst Group, but only after the Group increased its stake in the agency at the expense of previous majority shareholder, French conglomerate Fimalac , in 2014. It is in relation to the ownership of Fimalac that this current regulatory action relates. Yet, whilst most CRA-related transgressive behaviour revolves around weighted bias – weighted in relation to the power dynamics within the rating industry and its connection t

On a number of occasions here in Financial Regulation Matters we have discussed the credit rating and audit industries. They have taken up a number of posts on account of their negative and impactful behaviour, and in most of the posts we attempt to conclude as to why they a. act in such a manner, b. are allowed to continue acting in such a manner, and c. what may be done to alter that behaviour. Often, we conclude by discussing the oligopolistic features of their industry and implying that those dynamics are the fundamental answer to all three aspects. However, the word oligopoly is sometimes defined within the posts, but often it is not elaborated what the concept is and why it is so impactful within these financial industries that are so crucial. In this post we will dissect the concept of an oligopoly and examine why the two identified industries are absolutely defined by the concept. The term oligopoly roughly derives from the Greek words oligoi – meaning ‘few’ – and p

In this post, the focus will be on the recent decision by Moody’s to upgrade RBS’ credit rating, citing their ability to withstand future penalties for financial crisis-era transgressions. With RBS having been covered on a number of occasions here in Financial Regulation Matters , this post will take a different view of the Bank and look at the pending future it has. The question stemming from the recent upgrade is whether it indicates that the settlement with the U.S. Department of Justice (DoJ) will be as the bank expects, which is what Moody’s believe, or whether it will be much more, with the likely result being an incredible blow to the Bank’s attempted recovery. RBS was central in the Financial Crisis, and this is confirmed by the number of penalties and settlements it is facing. There were arguably three remaining hurdles in this sense up until recently (it has already faced and paid a number of fines since the Crisis), with one of those hurdles falling by way of the agr