Breakingvews: Regulation is bad for the raters
Source: www.breakingviews.com is Europe's leading financial commentary service.
Date: May 2003
Ratings agencies are under the regulatory spotlight. Moody's and Standard & Poor's were criticized for their role in the equity bubble: not spotting the likes of Enron in time. And now they are being criticized for their role in the post-bubble era: tipping companies over the edge by junking them too rapidly. In recent weeks a US congressional sub-committee has held hearings on the agencies, while the SEC published a consultation document on the industry. The implication of this activity is that the agencies need more regulation. But that's exactly the wrong conclusion - they need less.
This is not to say that the agencies have an unblemished record. Far from it. They have been slow to spot trouble. And they suffer from a big potential conflict of interest: the fact that their income comes from the companies they rate.
But what is the best way of improving the situation? Arguably to cut the red tape and expose the agencies to a more competitive market.
A big problem with the current set-up is that the agencies are viewed as private-sector regulators. This, in turn, has two negative consequences.