In a turn-up for the books, rating agencies have more than survived. Borrowers’ demands to have their homework marked have surged. During the market boom of 2021, Moody’s Investors Service, one of the “big three” agencies, made almost $4bn in revenues, compared with $1.8bn at its peak in 2007.
Ironically, rating agencies often spring into the limelight when they are least important. That is what happened on August 1st when Fitch, another of the big three, reduced the American government’s rating from+. After all, agencies do not offer superior expertise when it comes to the analysis of rich countries’ fiscal health. The economic data that they observe is widely watched by everyone else.
Companies that provide ratings nevertheless hold two important roles. First, they aggregate, sort and publish information about borrowers, which investors can analyse and use to compare them. Second, they act as a certification stamp on assets. Bank regulators use credit ratings to determine the capital requirements for lenders; funds use them to decide what they should and should not hold.
Rating agencies have a difficult job: not attracting negative attention is about as good an outcome as they can reasonably expect. During the deep financial distress early in the covid-19 pandemic, they quietly managed just that, as the Committee on Capital Markets Regulation, a panel of researchers from academia, banking and business, concluded when later assessing their performance. In 2020, 198 companies rated byGlobal Ratings defaulted, the most since the global financial crisis.