- Credit ratings are more often used than trusted. According to a recent survey conducted among financial market participants, 66% of respondents stated that their trust level relative to credit ratings stayed unchanged over the past year, while 24% of interviewees admitted a decrease in rating confidence and only 8% boasted an increase. When asked about credibility factors, 52% of survey participants claimed their absence. A critical attitude to ratings coupled with a their intensive usage is a typical worldwide trend.
- State regulation tightening is the main credibility driver. 75% of respondents see state regulation tightening in the rating sector as a positive or neutral factor, while 33% survey participants regard it as a driver fostering rating confidence growth. As a confidence growth factor, state control tightening has even outpaced the ‘correct risk assessment’.
- Wrong forecasts are to blame for mistakes. 83% of respondents relate the most notorious mistakes by rating agencies to bad predictions (poor-quality forecasting systems, inability to foresee the future), while 80% of survey participants noted that these errors produce no negative effect on the Russian financial market – something that distinguishes the latter on the global scale, where rating agencies are often blamed for the 2008 financial crisis.
- Global and Russian reputations are equally important for issuers. Of all the factors affecting client choices of rating agencies, the one called ‘reputation on the global market’ fetched the maximum score in the survey, while the one titled ‘reputation on the Russian market’ underperformed.
Ratings are still widely used, but less relied on
Survey participants were somewhat skeptical about credit ratings, although 74% of them do take these ratings into account while making investment decisions.
Over the past year, 66% of respondents saw their level of rating confidence unchanged, while with 24% of survey participants it declined and only 8% of interviewees admitted becoming more rating-confident (Figure 1). A trend to disregard cases fostering rating confidence that revealed in some half of the answers (52% of cases) reflects a common trend of generally critical attitude to ratings (Figure 3).
Among the respondent groups, the maximum increase in rating confidence over the past year was shown by representatives of public authorities (23% of them became more rating-confident), while the minimum growth was seen in the financial sector (in fact, 30% of the group saw their confidence drop), with the corporate sector posting the most stable performance (the trust level here stayed flat at 77%). The confidence level depends much on the scales used, with 75% of those who rely only on the national scale seeing their rating confidence on the downside (Figure 2).
Figure 1. Over the last year, your confidence in credit ratings assigned by agencies working on the Russian market…
Figure 2. …and I usually use ratings based on…
Regulation is the main confidence driver
Sate control tightening in the Russian rating industry has not been denied as a positive or neutral factor for market development by 75% of respondents (Figure 4), while 33% of survey participants consider this as a confidence growth factor. In this quality, increased government regulation has outpaced even the ‘correct risk assessment’ – a criterion chosen by 18% of respondents (Figure 3). To remind, the year 2015 saw an adoption of the Federal law N 222-FZ “On the Activities of Credit Rating Agencies in the Russian Federation”, which has set the new principles of rating activities regulation in the country, with regulatory requirements mentioned as an impetus to getting a rating by 38% of survey participants.
Among the factors marring ratings confidence over the past year, the most important ones, according to survey participants, were the ‘risk underassessment and delayed reaction’ (66%) and the ‘rating divergence with capital markets’ (38%). In a column where respondents could designate a factor of their own, most of them pointed to a problem of ratings being dependent on political issues.
Figure 3. What factors contributed to rating confidence growth?*
Figure 4. What factors contributed to rating confidence decline?*
Bad forecasting entails mistakes
As many as 83% of respondents relate the most notorious mistakes by rating agencies with wrong predictions, with 42% of survey participants blaming poor-quality forecasting systems, while 41% making a point about the very impossibility to foresee the future as such.
Conflict of interest as a cause of rating agencies’ mistakes was referred to by 39% of respondents, while 37% of survey participants expressed concern about professionalism of analysts and another 33% pointed at methodology errors (Figure 5).
More than half of interviewees (58%) stated that ratings have a strong influence on the financial market, with most of them (38%) being confident that this entails no negative consequences for the market (Figure 6). Those who did notice a negative impact on the financial market arising from mistakes by rating agencies accounted for only 19%, and those who accused rating agencies of the 2008 financial crisis amounted to just 1% of all survey participants. This is what makes the Russian market distinctly different from to the rest of the world where rating agencies are often blamed for the financial crisis of 2008.
Figure 5. What caused mistakes in rating assignment?*
Figure 6. Do you believe that ratings have an excessive impact on the Russian financial market?
Opinions divided over the market condition
While 57% of respondents believe that the credit ratings market in Russia is monopolized, the other 43% of survey participants consider it competitive. This pattern fundamentally differs from the global situation, where the rating industry is almost unanimously referred to as monopolized. The main question discussed globally does not even concern the issue of competitiveness or monopolism, but focuses instead on whether the monopolized condition of the market contributes to rating quality or not. Academic research rejects neither of these points of view.
As far as our survey is concerned, 70% of respondents claimed that monopolism reduces the quality of ratings while competition improves it (36% of survey participants believe that the Russian market has been monopolized and rating quality has been negatively affected, although 34% of respondents stick to the opposite opinion, while regarding the sector as a competitive one and, therefore, rating-quality-friendly). Only 30% of interviewees believe that monopoly is better for the market than competition.
Figure 7. How would you gauge the level of competitiveness in the Russian credit rating sector and whether this is beneficial or harmful to rating quality?
Global and Russian reputations are equally important
Of all the factors affecting client choices of rating agencies, the one called ‘reputation on the global market’ fetched the maximum score of 4.2 points on a scale ranging 0 to 5, while the one titled ‘reputation on the Russian market’ followed closely scoring 4.1 points, but still underperformed (Fig. 8).
The ‘large number of other issuers’ ratings’ landed at 3.5 points followed only by the ‘cost of services’ showing just 3.3 points. Meanwhile, the Russian market in general does see a very high level of dissatisfaction with credit rating coverage, with 48% of respondents considering rating coverage of Russian issuers insufficient.