Talking about credit rating agencies (CRAs) these days has become a rather delicate task. Given the scale of attention on their role in a crisis that continues to evolve, CRAs have become a highly politicised issue. At the beginning of the crisis, CRAs were heavily criticised for being by far too optimistic: this related to their role regarding structured products. Currently, they are being criticised for their pessimism in relation to sovereign debt ratings. One thing that has been agreed is that they will be more heavily regulated going forward, and their supervision will be the responsibility of the European Securities and Markets Authority (ESMA). So, how will ESMA go about doing this?
One thing should be made clear: CRAs provide a vital service to the financial markets and they will continue to do so in the future. Through research and industry expertise, CRAs rate the riskiness of companies, governments and financial products and by doing so, allow investors to factor risks in. ESMA is not there to do this job, nor does regulating them mean that ESMA will second guess ratings issued. Rather, the role of ESMA is to assure that the procedures and methodologies used by CRAs are sound, and to ensure ratings are being issued in a consistent and transparent manner over time. ESMA is not there to rate ratings, but to ensure transparency and consistency in CRAs’ business.
