Politicians should limit discussion of the merits of rating companies and scale back proposals for further regulation of the industry if it’s to stay competitive, said Fitch Ratings President Paul Taylor.
“There are too many politicians talking about ratings from my point of view at the moment,” Taylor said at a meeting of the Institute of International Finance in Copenhagen today. “There must be some advisers around that should be talking to some politicians about being less vocal about ratings.”
Governments have started to criticize the role of raters as downgrades executed in the middle of the euro area’s worst crisis risk raising borrowing costs and hampering efforts to restore stability. In Denmark, which holds the rotating European Union presidency, the government said last month it won backing in the 27-member bloc to reduce the dominance of rating companies in financial markets. Measures being considered include giving investors and issuers better access to suing raters, a prospect condemned by the industry itself.
Placing the burden of proof on the raters would “completely blow up the system,” Taylor said in the question and answer session following his prepared comments.
Moody’s Investors Service, which downgraded seven German banks and three lenders in Austria today, rejected concerns its actions are exacerbating the crisis.
“Markets have a much more pessimistic view of risk than we do,” Moody’s President Michel Madelain said today in Copenhagen. To blame rating companies for being pro-cyclical “goes beyond what is actually taking place,” he said.
The impact of ratings on markets is showing signs of fading. The bonds and stocks of some of Sweden’s largest lenders including Nordea Bank AB rose last month after being downgrade by Moody’s. Commerzbank AG, Germany’s second-largest bank, saw its shares gain as much as 2 percent today after it was cut one level by the rater.
Still, rating companies are needed to restore stability to markets as record funding needs loom, Standard & Poor’s President Douglas Peterson said. S&P estimates that more than $46 trillion in funds will be needed through 2016 to help refinance debt coming due and pay for infrastructure needed for global growth.
“The rating agencies can play a role in ensuring that there continues to be transparent information provided by those securities in a way that is done under strict standards of governance and control,” Peterson said. Relying on rating companies will help provide “consistency,” he said.
Raters also reject political calls to tighten regulation of the industry, Taylor said.
“We’re not really a financial institution,” he said. “We’re more like a publishing house.” He urged the industry to coordinate its actions globally and think more “holistically.”
“Is someone thinking about the totality of the regulations that need to be put in place, and the eventual outcome of those regulations?” Taylor said. “Who’s at the top of the global pile?”