Growing Ratings Data Overwhelms Regulators

Growing Ratings Data Overwhelms Regulators

The U.S. securities regulator is having trouble with rating agencies because it doesn’t have the tools or specific knowledge it needs to analyze huge amounts of rating data, according to a report from Reuters.

Right after the financial crisis about 10 years ago, Congress appointed the Securities and Exchange Commission (SEC) with the task of oversight for Moody’s and Standard & Poor’s (S&P), as well as Fitch and others. Those entities and their elevated ratings of mortgage-backed securities, analysts say, were gasoline for the U.S. housing bubble fire.

To try and combat this, the 2010 Dodd-Frank financial reform law made it a requirement for the SEC to collect data and analyze rating firms’ decisions so it could head off another financial catastrophe.

However, former and current workers at the SEC’s Division of Economic and Risk Analysis (DERA) told Reuters they don’t have the resources or technology to give the type of analysis they were tasked with doing.

Kimberly Earle, a former team leader at DERA, said there are many unanswered questions about the directive. “Despite a clear mandate in the Commission’s own rulemaking, there are still tons of questions about the lack of analysis the SEC is doing to credit rating agencies,” she said.

The SEC said the problems DERA faced were “generally resolved,” and that other departments pitched in to help.

Because of rising interest rates and a significantly large amount of leveraged lending, some investors are signaling that corporate ratings may not be as good as they seem.

The SEC, when it first started collecting data, asked registered ratings firms to give them monthly data on ratings changes. However, a few months later, they allowed the firms to give smaller sample data because the system wasn’t able to handle all of it. The Commission eventually came to the conclusion that the samples were not a true representation of the data. They ordered the firms to put the ratings changes on their websites, so that investors, along with the SEC, could analyze them. There were gaps, though, and internal emails showed there was some confusion as to which department should handle the issue.

Additionally, there has only been one enforcement action against a ratings firm since 2011, even though an SEC report showed at least 20 compliance failures that indicate misleading or inaccurate information about how firms arrived at their ratings.


New PYMNTS Report: Preventing Financial Crimes Playbook – July 2020 

Call it the great tug-of-war. Fraudsters are teaming up to form elaborate rings that work in sync to launch account takeovers. Chris Tremont, EVP at Radius Bank, tells PYMNTS that financial institutions (FIs) can beat such highly organized fraudsters at their own game. In the July 2020 Preventing Financial Crimes Playbook, Tremont lays out how.