About a-team Marketing Services
The knowledge platform for the financial technology industry
The knowledge platform for the financial technology industry

A-Team Insight Blogs

US Senate Banking Committee Closes Last Hearing of Summer with Ratings Agencies Discussions

Subscribe to our newsletter

During the last hearing before its August recess, the US Senate Banking Committee examined the current proposals circulating within the US regulatory community concerning ratings agencies. The Committee is expected to push through legislation on the subject in the autumn but took the opportunity this week to give the ratings agencies a further ear bashing.

Chairman Chris Dodd was particularly critical of the agencies for their impact on risk evaluation within the market. “Rating agencies market themselves as providers of independent research and in-depth credit analysis,” Dodd said. “But in this crisis, instead of helping people understand risk better, they hid risks throughout layers of complex structures. Instead of demonstrating independence, their ‘issuer pays’ business model and consulting services to the investment banks that structured complex securities compromised their independence.”

The discussions represent the start of the process to take the recent proposals for ratings agencies oversight and incorporate them into sound legislative proposals. To this end, Michael Barr, Assistant Secretary for Financial Institutions at the US Department of the Treasury testified at the hearing to examine proposals to enhance the regulation of credit rating agencies.

“Bad methodology, weak oversight by regulators, conflicts of interest, and a total lack of transparency contributed to a system in which AAA ratings were awarded to complex, unsafe asset backed securities. This broken system must be fixed,” said Dodd.

He discussed the part that these agencies had to play in the financial crisis (a popular topic for the regulatory community over recent months) and the reforms aimed at restoring public confidence in these firms. “Rating agencies need competent regulation and better information on which they base their ratings. They need to provide investors with clear information about their methodologies and performance. For too long, there has been no real penalty for publishing consistently erroneous ratings. That should be grounds for the SEC to revoke registration from credit rating agencies that consistently perform poorly,” he elaborated.

Crime and punishment, another popular theme over recent weeks… Dodd hopes to achieve this greater level of scrutiny and oversight via a “stronger regulator, with ample authority and qualified staff to deal with conflicts and abusive practices”.

The other proposals that have been discussed over recent months include repealing legislation that mandates the use of ratings for areas such as risk management and an end to the issuer-paid model for ratings services. The proposals would also bar ratings agencies from providing consulting services to any company they rated and would require them to disclose fees for a rating. This is to prevent “ratings shopping’’ in which a company solicits “preliminary ratings’’ from multiple agencies but only pays for and discloses the highest. Agencies would also be required to use different symbols for structured finance products, which are perceived to be riskier than other instruments.

These proposals were duly debated by the Committee this week but the industry will have to wait at least a month (as regulators pop off on holiday) to ascertain next steps of action to be taken. Happy holidays.

Subscribe to our newsletter

Related content

WEBINAR

Recorded Webinar: ESG data sourcing and management to meet your ESG strategy, objectives and timeline

ESG data plays a key role in research, fund product development, fund selection, asset selection, performance tracking, and client and regulatory reporting, yet it is not always easy to source and manage in a complete, transparent and timely manner. This webinar will review the state-of-play on ESG data, consider the challenges of sourcing and managing...

BLOG

FCA Greenwashing Rule Raises Questions Over Data Requirements

The UK will implement its own anti-greenwashing rule at the end of this month but some industry participants are concerned that its data requirements are vague and could be misinterpreted by institutions. The Financial Conduct Authority’s (FCA) rule, part of its broader Sustainability Disclosure Requirement (SDR), expects companies to ensure that any sustainability claims made...

EVENT

AI in Capital Markets Summit London

The AI in Capital Markets Summit will explore current and emerging trends in AI, the potential of Generative AI and LLMs and how AI can be applied for efficiencies and business value across a number of use cases, in the front and back office of financial institutions. The agenda will explore the risks and challenges of adopting AI and the foundational technologies and data management capabilities that underpin successful deployment.

GUIDE

The Reference Data Utility Handbook

The potential of a reference data utility model has been discussed for many years, and while early implementations failed to gain traction, the model has now come of age as financial institutions look for new data management models that can solve the challenges of operational cost reduction, improved data quality and regulatory compliance. The multi-tenanted...