DBRS Responds to EU Commission on Credit Rating Agencies

DBRS has published its response to a European Union commssion with a mandate described by some in terms that make it sound as more of a lynching than an inquiry:

It is generally accepted that CRAs underestimated the credit risk of structured credit products and failed to reflect early enough in their ratings the worsening of market conditions thereby sharing a large responsibility for the current market turmoil.

The current crisis has shown that the existing framework for the operation of CRAs in the EU (mostly based on the IOSCO Code of Conduct for CRAs) needs to be significantly reinforced. The move to legislate in this area was initially welcomed by the Ecofin Council at its meeting in July.

However, even the official press release shows an intense desire to scapegoat the credit rating agencies, rather than those who actually made the investment decisions:

The main objective of the Commission proposal is to ensure that ratings are reliable and accurate pieces of information for investors.

“reliable and accurate”? This is just another way of saying that investments should only be recommended if they go up.

DBRS stated in its response:

A key lesson for DBRS from the crisis was the need for additional transparency of its practices, policies and procedures and for additional education and dialogue with investors, regulators and other market participants regarding the role of a CRA and the meaning of a credit rating.

Very nice, very desirable, very useless.

There is already much more information available about everything than can be used, and there is far more information that can be used that there is that is used.

Any regulator that wants to get serious about discouraging herd behavior and bad analysis in the future will start by enforcing publication of returns. If you have a license, that license will – at least in North America – be verifiable on a regulatory website. If that license is being used in any way in an advisory capacity with respect to real live money … your composite should be published.

Proficiency is the ability to generate superior returns. All too often, it is measured by regulatory authorities as the ability to parrot introductory textbooks that may – or may not – have relevence to how the advisor actually formulates his recommendations.

Update, 2008-9-15: I found a response to this, a piece in the Guardian by David Gow:

The plans will force agencies to register, subject themselves to pan-European regulators and improve their corporate governance to avoid conflicts of interest with their client customers, including plans to rotate analysts every four years.

Bell, S&P head of structured finance for Europe, Africa and Middle East, said the proposals seemed to treat the ratings process as scientific, whereas mistakes were inevitable. “The provisions of the draft regulation are for regulators to have a direct influence on a variety of aspects of our work … They can take powers to make us desist.”

… rotate analysts every four years? rotate analysts every four years???? I’ve never heard a more moronic idea in my life. Take a guy off his desk, just as soon as he’s accumulated some valuable experience, for no reason other than rotation? That’s a thoroughly bankerly approach, an approach guaranteen not just mediocrity, but bland mediocrity. Which is an excellent way to run a bank, but rather less well suited for excellence.

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