Jun 14

It’s Shocking, Just Shocking: Performance Measurement at the Rating Agencies

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The SEC has just release for comment (within an aggressive 30 day period), their proposal for improving the process at credit rating agencies (NRSROs).

One suggested change is:

Require credit rating agencies to publish performance statistics for 1, 3 and 10 years within each rating category, in a way that faciliates comparison with their competitors in the industry.

Shockingly, this adds a hint of competition to an industry that is an oligopoly.  It is a slow move towards the word most hated and feared by Moody’s, S&P and Fitch – COMPETITION.   In a capitalist economy, lack of competition can lead to inefficient and ineffective markets….something that is still endemic in the NRSRO industry today.

We firmly believe this disclosure is a step in the right direction.  It might even get investors to realize how truly imperfect credit ratings are, and how important independent credit research is.  It should also be a stark reminder to investors that ALL portfolios with credit risk are subject to losses which can indeed be anticipated and analyzed in advance. 

Unsurprisingly, we are called upon to provide such quantitative analyses for our client portfolios.  Each portfolio exhibits a different expected loss distribution, but all portfolios’ credit loss distributions tend not to be ‘normal’ and are subject to severe negative spikes in losses in certain ‘unusual’ cases. 

Given the current and expected state of the economy, perhaps it is time for analysis of expected loss distributions in your company’s portfolio?