Credit Rating Agencies: Can They Get It Right? Part 3: Five Years After the Fall

This three-part series takes a critical look at the growing role of credit rating agencies (CRAs) in the global financial system. This post reports on the United Nations General Assembly (UNGA) debate about the role of CRAs in the international financial system. Part 1 focused on the involvement of CRAs in recent financial and economic crises in the US and Europe, while Part 2 described post-crises attempts to reform CRAs.

On Sept. 10, the UNGA hosted a Thematic Debate on the role of the CRAs in the international financial system. It was auspicious timing with just a few days shy of the fifth anniversary of the Lehman Brothers’ collapse and the beginning of the great financial crisis, in which the CRAs featured prominently as enablers.

The extensive, comprehensive debate offered participants an opportunity to take stock of what has been achieved over the past five years.

  • For CRAs, it offered a venue to showcase the impact of regulations on the industry and their efforts to increase transparency.
  • For sovereign authorities and regulators, it was another forum to point out the industry’s shortcomings and lament that not enough has been done.

This stock-taking spirit was in the same vein as broader reflections on the financial sector five years post-crisis — recognition that while a lot has changed much has also stayed the same.

Panelists included policymakers, regulators and representatives from Standard & Poor’s, Moody’s and Fitch Ratings. All agreed that despite achievements in regulations and oversight, certain structural issues — those often cited as posing the most risk to the global financial system — are far from being resolved. Prepared statements of representative countries, including Argentina, China, Ecuador and Venezuela, also reflected these concerns:

  • Lack of transparency and competition
  • Hardwiring, or automatic inclusion of rating requirements, into laws and regulations
  • Fundamental conflict of interest at the heart of the issuer-pays model

While the UNGA debate was an interesting addition to the international dialog about the ratings industry, it was by no means a game changer. But it did help illustrate both the shortcomings of the regulatory approach to repairing a still-broken international financial system as well as concerns about unintended consequences — for example, fostering growth of large institutions with resources to perform their own risk assessments.

The lingering feeling after the debate? Mission not yet accomplished. Yes, a lot has been done. But there was so much that needed doing in the first place.

The information provided is for educational purposes only and does not constitute a recommendation of the suitability of any investment strategy for a particular investor. Invesco does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Federal and state tax laws are complex and constantly changing. Investors should always consult their own legal or tax professional for information concerning their individual situation. The opinions expressed are those of the authors, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.




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