Sviaz-Bank Discusses Development of Independent Rating Services
OREANDA-NEWS. June 18, 2014. Sviaz-Bank (Vnesheconombank), the International Analytics Unlimited Bank Club, and the Association of Russian Banks have held a round table on the development of an independent rating services market in Russia.
The Banking Institute of the National Research University, Higher School of Economics, Russia, the Rus-Rating Agency, and the Expert RA Rating Agency acted as partners of the event organizers. The round table was moderated by Victor Chetverikov, General Director, National Rating Agency.
The round table participants discussed plans for developing a rating services market in Russia. They supported enthusiastically the need for healthy competition in this business area. Anatoly Milyukov, Executive Vice President of the Association of Russian Banks, said that rating agencies would not develop in the absence of a smoothly regulated competition in the rating system. Moreover, the rating agencies have to be competitive on both the domestic and foreign markets.
Irina Melnikova, Chief of the Office of Self-Regulated Organizations, Rating Agencies, and Actuaries, Financial Markets Development Department, the Bank of Russia, said that the Russian Central Bank was working on a bill to regulate rating agencies’ operations. Aside from anything else, the bill sets requirements to participants of this market segment, in particular, an agency’s mandatory accreditation by the Central Bank; disclosure of methodologies, models, and key assumptions guiding rating assignment; and mandatory internal monitoring within a rating agency, and also standards to be followed by analysts.
The bill also gives the Bank of Russia powers to audit rating agencies, apply penalties, issue orders, and so on. Irina Melnikova believes that “acceptance of common rules for entry into the market that meet the European regulator’s standards, ESMA, will close the issue of choice between the terms ‘international rating agency’ and ‘Russian rating agency’ in a natural way.”
Yekaterina Mozharova, Deputy Director, Rating Consultancy Center of Gazprombank, spoke about the history of the Big Three rating agencies that cover 95% of the world market and the European Securities and Market Authority that regulates the agencies’ operations. “The agencies make money on their reputation,” she believes.
Yakov Mirkin, Head of the International Capital Markets Department, Institute of World Economy and International Relations, focused the audience’s attention on the idea of a Russian rating platform that could become an alternative to a single-nation rating agency. He said government support would be needed for the national brand to make it competitive and send money flowing into the issuers’ treasuries.
Professor Alexander Karminsky, Banking Institute of the National Research University, Higher School of Economics, overviewed the purpose and limitations of ratings, credit risks and ratings, dynamics of rating services for Russian banks, methods of comparing rating scales, and the concept of a common rating environment. He also put forward several ideas, including the favorable shift of activity toward Russian rating agencies. Prof. Karminsky gave thumbs up to rating business regulation on the basis of a mega-regulator.
Alexander Baranov, Deputy General Director of the Pallada Management Company, said that the rating scales could be compared with one another with reservations because all rating agencies use different methodologies. He suggested that companies develop their own scales and use a rating agency’s assessment as a cutoff. “Developing a single rating scale is unfeasible,” he said. According to Zoya Larkina, General Director of the AK&M Rating Agency, at least the regulator must have a correspondence table.
Alexander Zaitsev, Rus-Rating agency’s General Director, offered a look at the market of Russian rating agencies turning over 400million rubles, a poor match for the Big Three’s market of \\$15 to \\$19 billion. He suggested mandatory rating for public companies, mandatory double rating, with assessment made according to the lowest reading, and came out for monitoring of the quality of services provided and ethics.
Pavel Samiyev, Deputy General Director of the Expert RA rating agency, spoke about the threefold growth in the rating services market since 2008, to 1,800ratings of banks and nonfinancial companies. According to Pavel Samiyev, so far development of rating agencies’ regulation falls behind the market growth rates. The principal objectives now are synchronizing regulation in Russia with regulation in other countries, developing a common comparison scale, and preventing discrimination against Russian rating agencies.
In the view of Alexei Grabarov, Head of Sviaz-Bank’s Center for Monitoring and Analysis of Active Operations, even though steps have been taken into positive territory, a “culture” of credit rates has not yet struck root in Russia. There is only minimum demand from borrowers for the services of local rating agencies. The principle of “better a poor rating than none at all” followed widely in developed markets has not yet caught on in Russia, and the costs of borrowing on the domestic market are influenced little by the rating. People, who can afford to borrow funds on foreign markets, turn to the Big Three rating agencies. Time is needed above all for national rating agencies to earn a reputation and be able to compete with the Big Three, at least on the domestic market.
The round table participants have availed themselves of the discussion results to identify the steps to be made – using the ratings of all accredited agencies on a par basis; replacing “international” and “national” with “accredited;” using only the term “accredited agencies” in documents; using the agencies’ complete scales, rather than cutoffs; applying discounts depending on the level of risk; always requiring two ratings from agencies and accepting the lowest; eliminating bias; producing a new scale for comparing local and international scales of accredited agencies; and assuring the absence of links between the parties and conflict of interest of a rating agency and market participants through the stockholders.
The participants agreed that the rating agencies’ operations in Russia must be regulated, and that this was a job for the Central Bank. According to Pavel Samiyev, though, standards for rating agencies’ operations must apply to procedures only, not methodologies because no one can tell whether a methodology is right or wrong. In Alexei Savatyugin’s view, no rating agency will disclose its methodology.
At the end of the round table, the participants put forward an idea that the bill concept be laid out for discussion and that after they have studied its text, they could make comments and suggestions. The Central Bank’s representative said the bill will be circulated for public discussion approximately in late June.
The round table was attended by almost 50experts representing the Bank of Russia, the Ministry of Economic Development, rating agencies, banks, and management companies.
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