Gold Magazine September - October 2013, Issue 30 | Page 50

credit rating

times have a much bigger impact than they
ought. Part of the problem is that ratings
have been “hardwired” into the financial
regulations of many countries and into the
investment mandates of major institutional
investors. As a result, we have seen instability in markets where a ratings downgrade by
one of the ‘Big Three’ – whether justified
or not – triggers a massive sell-off of the
downgraded stock, worsening an already
bad situation for the rated institution. But
we have also seen complacency, where longterm investors hold a financial instrument
because a couple of agencies have given it
an ‘AAA’ rating, without undertaking any
credit analysis of their own.
Rating agencies are not really to blame
for the hardwiring and many governments
are now actively seeking to discourage this
mechanistic reliance on ratings.
Gold: The “Big Three” were roundly
criticized for their flawed assessments
prior to the US sub-prime crash which
led to the global financial crisis. Since
then, do you think they have changed
anything about the way they work?
Z.D.: I suspect quite a lot has changed, due
in no small part to the growth in regulation
and increased scrutiny of rating agencies in
many countries. For example, in the EU,
rating agencies were not regulated prior to
September 2009. Now any rating agency
that wants to operate in the EU must be
registered with the European Securities and
Markets Authority (ESMA) in Paris. The
requirements for registration are quite stringent and agencies are subject to ongoing
monitoring of their activities. We have all
had to strengthen our internal controls and
compliance functions, in addition to being
more transparent about how we assign ratings. Regulation has been generally good
for the industry and for Capital Intelligence
specifically, as we believe it will increase
market confidence in the ratings we issue.
Gold: How complex are the issues that
you have to take into account before
issuing or changing a rating?
Z.D.: In general we look at a number of
quantitative and qualitative factors that may
affect the ability and willingness of a rated
entity to meet its financial obligations in
full and on time. In the case of a bank, for
example, we examine asset quality, capital

CAPITAL CONTROLS AND
RESTRICTIONS ON DEPOSIT
WITHDRAWALS IN CYPRUS
ARE UNLIKELY TO BE
PHASED OUT QUICKLY
adequacy, liquidity and profitability. But we
also look at factors that may be important
for longer-term creditworthiness, such as the
bank’s market position, business strategy and
management capabilities. We would also
analyze the bank’s operating environment,
including the degree of economic and political risk in the bank’s principal markets and
the quality of the regulatory and supervisory
regime in which it operates.
Gold: How much of the banking sector
collapse in Cyprus did you “predict”?
Z.D.: I seem to recall that by the middle of
2011 we were warning about weakening asset
quality and worsening operating conditions in
both Greece and Cyprus for the major Cypriot banks and also that the Greek sovereign
debt crisis presented significant downside risks
to their financial strength. A year later, we
warned that the government was in urgent
need of official financi [\