Confirmation that transparency reduces relevance of rating firms

A Bloomberg article confirms that the more transparency provided to market participants, the less relevant the rating firms are.

The response to the Moody’s Investors Service downgrade of the biggest Nordic banks was rising bond and share prices. 

The reaction is the latest sign that investors are paying less attention to the views of rating companies and relying more on their own analysis to determine whether to buy or sell.

“We can see for ourselves just how strong the Swedish banks are so we don’t place much weight on what rating agencies tell us,” Nicklas Granath, a partner at Stockholm-based asset manager Norron AB, who helps manage about $200 million, said in an interview. “More and more the market is likely to take the same approach.” 

Even though Sweden doesn't require the banks to provide ultra transparency, it has a history of requiring the banks to recognize the losses hidden on and off their balance sheets.

As European policy makers try to reduce the dominance of rating companies in financial markets, investors are showing greater willingness to ignore Moody’s, Standard & Poor’s and Fitch Ratings.... 

“The Nordic banks are in general very solid and have currently no issues in funding,” said Espen Furnes, an Oslo- based fund manager at Storebrand Asset Management, which oversees $72 billion. “Moody’s is knocking down open doors with this. In these volatile markets the rating agencies are definitely behind the curve and, strangely enough, could be at risk of being considered irrelevant by the market during times when they actually do have something critical to say.”...

Keep in mind that the rating firms' business model is currently built around the idea of access to proprietary information.  Prior to their ratings being changed, banks have a chance to present the facts that they feel merits a higher rating.  Facts that are not always available to all market participants.

In Denmark, banks have started firing Moody’s after winning assurances from some of the country’s biggest investors that the opinions of ratings companies hold limited value.... 

Swedish banks, still among the best-rated in Europe, are now signaling they may rethink their cooperation with the rating company.

Cooperation that results in the rating firms having an informational advantage compared to other market participants.

“It is hard for” rating companies “to keep track and when you come close to them it is quite apparent they have difficulty following everything that is happening elsewhere,” [Swedbank Chief Financial Officer Goran] Bronner said. “The key is more transparency and then the market can decide.”

In particular, ultra transparency under which the banks disclose on an on-going basis their current asset, liability and off-balance sheet exposure details.  With ultra transparency, the market participants have access to all the information they need to independently assess the risk of each bank.