Rating Agencies: who regulates them?
What has changed for Rating Agencies since the 2008 Crisis?
In the last few days, one of the world's largest rating agencies, Standard & Poor's, confirmed Italy's BBB rating with a positive outlook. Good news then, considering the pandemic situation that has undermined the country's economy. The agency explains that:
the positive outlook reflects the extensive pro-growth reforms that the Italian authorities are implementing as part of the National Recovery and Resilience Plan.
Moreover, we expect these reforms to mitigate the risks arising from the conflict between Russia and Ukraine. Although Italy's growth estimate for 2022 was 3.1%, compared to the 4.4% initially forecast, the country was not particularly affected by the health emergency.
The Standard & Poor's agency, which issued the rating, was well known in the 2008 crisis when it became known that rating agencies were involved in the events that caused the Great Recession. You might be wondering: how do rating agencies work now? Who regulates them? Can all rating agencies issue sovereign ratings? We want to answer all these questions.
The Regulator of Rating Agencies in Europe: ESMA
Following the bankruptcy of Lehman Brothers, the European Union (which was also involved in the crisis) was anxious to do something about it. For this reason, there was the introduction of the new Basel III agreements. The Basel Committee contains the regulators of the G20 countries, and the agreements provided for greater transparency and improved risk management and financial shock absorption capacity on the part of financial institutions. As far as the European Union is concerned, stricter regulation of rating agencies was required, so the European Securities and Markets Authority (ESMA), the financial instruments and markets supervisory authority, was created in 2011. ESMA's task is to supervise and regulate Rating Agencies' activities, which operate under the European Regulation 1060/2009, known as the CRA Regulation.
Legislation to regulate Rating Agencies
Before 2009, each Individual State decided on the regulation of Rating Agencies' for itself, and therefore there was no legislation common to all countries. With this new regulation, however, it was recognized the need for specific requirements to operate as a Rating Agency on the territory of the European Community, and ESMA became the regulatory body able to check that Rating Agencies respect these requirements. Therefore, from 2009 onwards, to operate as a Rating Agency, it is necessary to be registered as a CRA (Credit Rating Agency) and be on the official list of ECAIs (External Credit Assessment Institutions). All CRAs fall under ECAIs, as the term includes all institutions other than banks and insurance companies authorized to issue credit ratings. In order to operate as a CRA, agencies must publish continuously updated information on their independence and management of conflicts of interest, as well as on the services they provide and their policies regarding the publication of ratings, remuneration, and code of conduct.
The democratization of ratings
These days, thanks to Fintech technologies, part of the rating process can be automated using algorithms and statistical models. This has led to the creation of services that let you check a company’s creditworthiness assessment without needing a traditional agency. A great example is s-peek, developed by modefinance, which offers credit scores for all Italian companies and over 25 million European businesses.
Try it out – the registration is free!
to learn how to financially
evaluate partners,
competitors and customers