Thursday, February 16, 2012

By factoring in the 'opacity of risk' into its ratings, did Moody's just call for ultra transparency?

According to a Bloomberg article, in reviewing banks and securities firms, Moody's is now factoring in the 'opacity of risk' into its ratings.

Regular readers have long known that it is impossible to assess the risk of banks and securities firms that do not provide ultra transparency and disclose on an on-going basis their current asset, liability and off-balance sheet exposures.

The Bank of England's Andrew Haldane refers to banks and securities firms that do not provide ultra transparency as 'black boxes'.

The lack of disclosure by these banks is similar to the lack of disclosure by the subprime structured finance securities.

By acknowledging the 'opacity of risk', Moody's is saying that, similar to the subprime structured finance securities, their ratings are not based on what is actually happening at these firms, but are assumption driven guesses of their best clients financial strength.

Said slightly differently, if there is going to be a realistic assessment of these firm's risk and financial strength, these firms are going to have to provide ultra transparency.

UBS AG (UBSN)Credit Suisse Group AG (CSGN) and Morgan Stanley (MS)’s ratings may be lowered by as many as three levels by Moody’s Investors Service, which is reviewing banks and securities firms with global capital markets operations. 
Goldman Sachs Group Inc. (GS)Deutsche Bank AG (DBK)JPMorgan Chase & Co. (JPM) and Citigroup Inc. (C) are among companies that may be downgraded by two grades, Moody’s said in a statement, adding that the “guidance is indicative only.” 
Credit-rating downgrades can raise a company’s borrowing costs, and for securities firms they can also affect business by obliging them to provide more collateral on trades. 
Banks worldwide are facing risks stemming from higher funding costs, investor confidence roiled by Europe’s sovereign debt woes, and increased regulation following the 2008 global financial crisis. 
“Capital markets firms are confronting evolving challenges, such as more fragile funding conditions, wider credit spreads, increased regulatory burdens and more difficult operating conditions,” Moody’s said. “These difficulties, together with inherent vulnerabilities such as confidence- sensitivity, interconnectedness, and opacity of risk, have diminished the longer term profitability and growth prospects of these firms.”


Anonymous said...

Or, your post has set them scrambling to assure the Opacity Protection Team that they are not endorsing your call for ultra-transparency.

Jay Reeves said...

It seems true that Moody's just call for ultra transparency by factoring in the 'opacity of risk' into its ratings. I know that many people are interested about this factoring rating. It would be such an interesting topic to business owners.