One of the key breakdowns
in the financial system that brought the world to financial crisis and (who knows ruin) was the rating agencies. In my opinion
the failure of the ratings agencies has to be a factor, as virtually all credit checks undertaken by financial institutions
would have used any of the big three, Standard & Poor’s, Moody’s or Fitch and the fact that counterparties
were given a clean bill of health, proved false.
Any bank would have taken notice of a credit concern and would have certainly curtailed or at
least scaled back any exposure. If the trust that banks put in these ratings agencies was to produce accurate assessments,
this was obviously misplaced as far too many banks should not have been rated so highly. By the time that the ratings started
to reflect the actual risks it was far too late for any bank to act to reduce their exposures.
Why
is it that the rating agencies failed to detect the risks for which they were paid considerable amounts of money by the banks?
The
questions which need to be asked by the industry are:
1) How independent are they ratings, when the rating agencies are paid huge amounts
of money by those being rated?
2) How resilient is the ratings process and to what depth and breadth are the
tests to capture risks and exposures by country, product and counterparty?
3) Why are the rating agencies not regulated?
4) Why are the processes used by rating agencies not audited and tested for fairness
and completeness?
The
answers to these questions are sadly going to show that the rating agencies processes were not comprehensive enough and were
unable to achieve the results that the banks were looking for. Well, certainly not in the timeframe required by banks to enable
remedies.
The
question concerning genuine independence and objectivity is fundamental to the value of any rating or accreditation and something
that my own company works hard to achieve and maintain. Maybe the rating agencies should take leaf out of the B.I.S.S. Research
book and set up a truly objective system using processes that divorce the rating results from the commercial.
The
B.I.S.S. Accreditations use an independent cross section of people who are experts in their field and are able to provide
assessments based on their knowledge and experience but under standard criteria. This is similar to the Bank of England using
expert economists to discuss and agree interest rises and falls. The government has no say with the Bank of England and are
just one of the panellists. The result is objectivity divorced from policy and commercial interests.
If
each rating agency structured their processes from truly independent and objective sources, the results would be more valuable.
With modern communication technology it should prove no problem to build a worldwide assessment network of analysts that capture
the hot spots and feed them back to be calculated. Now, this is a departure from their existing process but would at least
create more objectivity.
Tough
questions have to be asked concerning the ratings process and the agencies role in providing accurate information within a
timeframe that the banks need. The independence of ratings has to be in question under their current commercial structure
and banks within financial services must accept the services offered by ratings agencies is not really independent and they
need to build their own credit rating assessment process where the purchase of data must be just a part of the solution.
Ratings
processes have clearly been too superficial and unregulated and have given false comfort to banks and regulators. As the markets
keep developing new complex financial products, the ability of rating agencies has obviously fallen behind and they were not
been able to fulfil the role that the financial markets thought.
This
failure in the ratings sector of the financial services chain cannot be undervalued when the post mortem begins and may prove
to be one of the most scandalous aspects in this financial debacle.
By
Gary Wright M.S.I
