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Credit of Credit Rating Agencies on Knife`s Edge

Posted May. 25, 2002 09:11,   


▽Credit evaluation is `rubber stamp`? = The latest (on 18th) weekly magazine Economist in U.K. reported that disbelief of credit rating agencies, so called `rubber stamp` is spreading among some investors, as dispute between financial agencies, whose credit level has been degraded by credit rating organizations ensues, besides Japanese government.

Credit rating relevant to respective bond is relatively considered to have high reliability, however, objections related to credit rating of nation or company is occurring continuously.

BBC reported that many analysts regard credit rating agencies as `means for re-confirmation` only.

The U.S. Securities and Exchange Commission (SEC) started full-scale investigation on three credit rating agencies such as Moody`s, S&P, Pitch, as the noise surrounding result of credit rating doesn`t quit.

SEC is looking in to the fact if these three companies of Nationally Recognized Statistical Rating Organization (NRSRO) disturb joining market of new rating agencies by mutual consent in prices, or if there is unfair bargain with companies who receive evaluation.

Experts point out that simple standard of credit evaluation, from AAA to D is incompatible to the demand of market that rapidly changes.

Economist raised question whether it is suitable to use existing old scale to measure new financial goods which are continuously being developed, saying that degrading credit level of stock by securing assets, which is in popularity these days, is its example.

▽ Effort and task for reformation= Credit rating agencies also carry out reformation by themselves such as fractionating standard of evaluation.

Announcing new standard for evaluating company like including value of stock option in to profit by S&P on 14th is also one of such effort.

However, how to secure fairness of these agencies remains a home work still.

The U.S. `advisory law of investment` only regulates responsibility of credit rating agencies but doesn`t mention about reliability and quality of credit evaluation.

There is indication that agencies in NRSRO are only three, on the contrary, market is growing day by day, therefore, accurate evaluation is limited.

Economist, suggested measures such as △ raising market competition by allowing credit evaluation by insurance company, etc △ changing credit evaluation for pay △ reinforcing control regarding credit rating agencies.

The magazine said,“ following result of evaluation of credit rating agencies blindly by financial agencies or investors is also a problem” and “it is a reality that national policy moves following credit level and fate of company is being decided by a word from credit rating agencies”.

However, new bazel agreement mentions that credit level by credit rating agencies should be used as means to measure investment value and risk of each bank till year 2006, therefore, credit evaluation has got absolute and wide influence.

Professor Kon Kitting in FDC London advised, “ for maintaining reputation of three rating agencies, they will have to consider professionalism specifying subject of evaluation”.