The ‘Big Three’ credit rating agencies – Standard & Poor’s, Moody’s, and Fitch – enjoy an oligopolistic position on the market for the rating of private and public debt. In the run-up to the financial crisis, we now know, they were over-optimistic with their ratings, but once the crisis hit, their ratings went into a very fast downward spiral. This is considered to have contributed to the severity of the crisis. A similar pattern could be observed when the sovereign debt crisis started in the European Union.
In both the USA and in Europe, legislation was enacted to rein in the agencies’ power as well as to prevent possible conflicts of interest which might lead to biased ratings. The backward-looking character of the ratings, which were based more on past performance than on a thorough analysis of likely future evolution, came under scrutiny.
Calls were made to create new credit rating agencies, which could, if necessary, be public ones. After some initial enthusiasm, these ideas – and at least one serious attempt – stalled. The main problems were possible accusations of market manipulation, insufficient credibility, and the lack of financing. The European Commission has recently said a new European rating agency would add little to investors’ information. It is unclear whether new attempts will be made to create an alternative rating agency, but there are still ways to reduce the hold of the ‘Big Three’ on the ratings market, including by putting more weight on internal ratings, as well as by relying on third-party assessment.