Rating agencies will soon face tough competition as regulators are looking at alternatives.
The idea is to stop over-reliance on the ratings agencies. From the agencies’ perspective, this could be the end of a highly profitable oligopoly.
New York Insurance Department Deputy Superintendent Hampton Finer tells us that the department, along with others, has been in talks with several companies to offer them to provide their service. The companies include BlackRock, PIMCO, Promontory and Risk Metrics, he said, who all are interested and see it as an “opportunity.”
“We need to look at this more broadly. There is a lot of analytical talent out there,” Finer says
To begin with, Finer says the new competing companies would only rate residential mortgage-backed securities, avoiding the more obscure structured products. But since these represent half of the structured products business, the lost of this business would be a major blow to Fitch, Moodys and S&P. The project is still at the proposal stage currently, but the new system could come as soon as year end.
Asked what would happen to the rating agencies once stripped of their business, Finer said that “they bring some value in some areas and they’ll have to focus on those.” Those areas are munis and corporates–the stuff they originally rated before they decided to get involved with the more lucrative structured products business.