全球風險管理專業人士協會(GARP)的年度研討會上講話
中國誠信（亞太）信用評級有限公司董事總經理李永權先生
香港中環長江集團中心27樓彭博香港
2012年12月6日
(只有英文版本)
Good evening, ladies and gentlemen. It’s my great pleasure to be here to give a short speech of about 5 to 10 minutes. In my past talk or presentation, I often ran over by half of the time given to me. So, this time, to follow the instruction of the organizer, I will read out my speech.
In the debt capital market, before the turn of the century some ten years ago, the credit rating agencies had long been regarded as the most trustworthy institutions in credit assessment on the repayment ability of debt issuers and specific issues. Investors relied on credit rating results to purchase debt issues and banks referred to the credit rating results to lend money. The credit rating agencies enjoyed a good reputation and authority.
But the reputation and authority of the international credit rating agencies were seriously hurt in the past ten years on three occasions: first, their fast down-grade of the credit rating on South Korea during the Asian financial crisis in 1997; second, maintaining the AAA-rated Enron Corporation until it went bankrupt in the early 2000; and third, assigning an AAA rating to the securitized sub-quality financial assets which helped trigger the outbreak of the international financial tsunami in 2008.
Financial regulators in advanced countries and international investors then seriously criticized the credit rating agencies on their business ethics and their rating methodologies.
Now the question is: should investors and banks continue to rely on the credit rating results of credit rating agencies for their investment and lending?
Some regulators suggest investors and banks should not rely solely on credit rating results by credit rating agencies, rather they should have their own credit analysis teams to assess the credit worthiness of the debts they have kept or going to invest. Some say that the credit rating industry should be opened up further to break the current monopoly situation dominated by the three international credit rating agencies. Some say that the “issuer-pays” system embeds conflict of interests between the issuer and credit rating agency; therefore it should be changed to the “investor-pays” system.
When we look back at the past, we find that credit rating was driven by the U.S. Federal Reserve after the Great Depression in the early 1930s. At that time, the U.S. Federal Reserve required U.S. banks to invest in debts with credit ratings because one of the causes of the Great Depression was that U.S. banks invested in debts of low-credit quality and the banks had not done a proper credit analysis on the debts invested.
The introduction of credit rating through the service of credit rating agencies can help banks and investors better understand the credit quality of the debts they invest in. The standardization effect of credit rating also helps promote debt-trading activities.
Over the past three years, there has been a voice of ignoring the credit rating agencies. In our today’s capital markets and financial markets, if credit rating agencies did not exist, we would be in a danger of going back to the financial world of some 80 years ago.
It is true that credit rating agencies had too much of a free reign in past years. The only major risk they faced was reputational risk. No credit rating agency can continue doing credit rating business if its reputation is lost.
Eight years ago, the International Organization of Securities Commission (IOSCO) launched a Code of Conduct and suggested that its member countries enforce it for their registered credit rating agencies.
Since 1 June last year, the Hong Kong Securities and Futures Commission (SFC) require credit rating agencies operating in Hong Kong to receive a license from it and to adopt its Code of Conduct. These requirements can regulate the corporate governance and business ethics of a credit rating agency. Any credit rating agency breaching the regulations will be warned or penalized by the SFC.
In the credit rating industry, independence, integrity, and fairness are the three key elements that all credit rating agencies must strictly uphold. Avoidance of conflict of interest is the key to keeping these three elements in shape. The long-adopted “issuer-pays system” has been criticized as having potential conflict of interests between the issuer and the credit rating agency as an issuer may be willing to pay more to get a higher credit rating from the credit rating agency it appoints. On the other hand, a credit rating agency may not want to lose the business, and therefore it may tend to fulfill the expectations of the issuer.
When we look into audit practice, it is quite similar to the credit-rating practice in the pay system. In the audit industry, the “corporation-pays system” is adopted. A corporation pays its auditor to audit its accounts. But the embedded conflict of interests can be minimized by way of regulatory penalty and criminal prosecution. So far, debt investment and credit lending are mainly done in the professional markets that the protection of small investor measure is not as strict as in the equity market where there are many small and non-professional investors. There may be a chance that the securities commission would tighten its regulations on credit rating agencies.
Other than the “issuer-pays system”, there is the “investor-pays system” adopted in a few domestic credit rating markets. The “investor-pays system” is said to avoid the conflict of interest that could exist between the credit rating agency and the issuer.
Yes, I agree that it can work, but only in a small investing community in a domestic market. It is unpractical in the international market as the international market is big in size and diversity in investing nationalities. How to get enough investors to pay the subscription fees and how to solicit an issuer to give sufficient information to credit rating agencies for credit analysis are the practical challenges.
In the “investor-pays” system, a conflict of interest between the credit rating agency and the investor may also arise if the investor is the bread-and-butter client of the appointed credit rating agency. Then, the credit rating agency may tend to maintain the same credit rating or even upgrade the credit rating of the debts held by its client investor.
To conclude, credit rating is proven necessary for the healthy operation of capital markets and financial markets. Before investing in a debt security, investors are advised to look into the track record of the credit rating agencies and their knowledge about a country’s economy, politics, culture, and society where the rated issuer resides.
Investors should be open-minded when choosing a credit rating agency. Do not necessarily always go for the “old”.
Thank you.