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For the smaller credit rating agencies (CRAs) based in Europe, a draft technical standard outlined by the European Banking Authority (EBA) for the mapping of ratings would mean exclusion from entering into the covered bond market, CRAs have denounced.
The new methodology would map down the AAA or AA ratings assigned by CRAs that have not issued at least 496 AAA or AA ratings. But smaller CRAs, which are around 15 in Europe and have two or three years of life on average, said in fact it is practically impossible for them to reach that scale.
The impact of down mapping
That is to say, if the draft technical standard - which is currently under development by the Joint Committee of the European Supervisory Authorities (ESAs) and will be submitted to the European Commission (EC) for adoption - is enacted, the capital requirements of the buyers of bonds will have to raise by a factor of 2 to 2.5 times.
"This very likely would lead to the issuers deciding not to give the mandate to rate their bonds either to us or any of the smaller CRAs," Carlo Barbarisi, General Manager of CRIF, an Italian rating agency based in Bologna, explained to Xinhua.
The mandate would be likely given to S&P, Moody's and Fitch, which "only in theory" meet the EBA requirements, Barbarisi stressed. "Not even they have such an experience of AAA or AA ratings assigned to companies, banks or Sovereigns. They are just able to compensate for them with ratings assigned to securitizations or covered bonds, which are more secure by definition," he elaborated.
The same strategem seems not to be valid for smaller CRAs, despite their global profile, experienced staff and ability to provide high-quality ratings having been confirmed by the European Securities Market Authority (ESMA), the independent authority aimed at building a single rule book for European financial markets.
"No level playing field"
Before joining CRIF, Barbarisi worked more than 13 years in two of the three global rating agencies, covering origination and relationship management roles. "I know what monopoly means, and therefore I can say with hindsight that markets need more competition," he told Xinhua.
"Though I do not believe that the totality of new CRAs can survive in the long term, I am strongly convinced that independent providers of opinions on credit risk are very beneficial to markets and investors," he said.
Dagong Europe, the European branch of Dagong Global Credit Rating Co., Ltd., one of the earliest credit rating agencies of China, was established in 2012 under and compliant to the European framework regulated by ESMA.
The Milan-based agency counts on an international, experienced team with the mission to reflect the growing importance of Chinese investors in global markets and also promote the flows of foreign capitals into China.
"Dagong is a globally recognized brand. Although we are a smaller player in the rating industry in Europe, we are confident that the quality of our work compares very well with anyone operating on a way larger scale. Our belief is that quality should be judged over quantity," Ulrich Bierbaum, Dagong Europe General Manager, told Xinhua.
"We have always considered the European authorities to be in favor of encouraging competition among rating agencies. However, this regulation does not seem to follow the spirit of that philosophy," he said.
In his view, considering that Dagong Europe's focus is investors from China, the down mapping might not create as much impact on Dagong Europe as it might on other smaller rating agencies in the continent. "In essence though, the proposed regulation is certainly not part of the level playing field expected by Chinese and European investors," Bierbaum stressed.
"Shyness" of EU reforms
Asked by Xinhua why the requirement regarding minimum number of AAA or AA ratings has not been deleted so far as insisted by smaller CRAs, an EBA spokesperson - who had to remain anonymous for the authority's policy - highlighted that "the EBA applies the same requirements to all rating agencies in its ratings mapping."
The primary objective, well consistent with what is prescribed in the European Union (EU) legislation on CRAs, is to ensure that prudent levels of capital are set for European banks, the spokesperson said.
"Rating agencies that are not able to provide the required data on their work are given mappings that reflect such uncertainty. This efficiently limits the risk that capital requirements for European banks are underestimated," the spokesperson added.
A senior Commission official - who also had to remain anonymous for the EC policy - said the mapping of the ratings shall be "objective and consistent, and shall comply with quantitative and qualitative factors as well as a benchmark."
The senior official told Xinhua that enhancing competition in the credit rating market remains an important issue, "one of the cornerstones of the last reform of the legislation on CRAs in the EU, with a number of provisions containing measures aimed at promoting competition on the credit rating market."
Certainly the many fulfillments, formalities and requirements imposed by the EU authorities have the objective to ensure the reliability of smaller CRAs, but overload them with costs that are unsustainable for them, Mauro Bussani, professor of comparative law at the University of Trieste and Scientific Director at the International Association of Legal Sciences (IALS-Unesco), noted.
"In this way, a clear rift is created between declared objectives and operating practice," he explained to Xinhua.
The opening up of credit rating market theorized in the EU legislation, he said, is practically hampered by "shyness" of European reforms: despite the EU's belief that competitiveness in an essential instrument to encourage virtuosity of CRAs, the regulatory approaches content themselves with bureaucratic tools that end to leave "the monopoly of the 'three sisters' unchanged and substantially free from any responsibilities," Bussani concluded.
