Regulation is an abstract concept of management of complex rating systems according to a set of rules and trends. In rating systems theory, these types of rules exist in various fields, but the term has slightly different meanings according to context. State-mandated regulation is government intervention in the private market of ratings in an attempt to implement policy and produce outcomes which might not otherwise occur, ranging from investor or issuer protection to faster growth or political advancement. The regulations may prescribe or proscribe conduct, calibrate incentives like rating fees, or change preferences by reducing the free choice of a rating agency. Common examples of regulation include controls on market entries for rating agencies, prices, wages of rating analysts, development approvals for rating criteria, employment for certain people like Independent Non-Executive Directors in certain rating organizations, standards of analysis for certain financial products, and ancillary services. The EU regulation on credit rating agencies e.g. introduced a common approach to the regulation and supervision of credit rating agencies within the European Union. This approach was designed to enhance the integrity, responsibility, good governance and independence of credit rating activities to ensure quality ratings and high levels of investor protection.
Looking forward to 2022, Morningstar, Inc.’s Joe Mansueto, Executive Chairman and Chairman of the Board, and Kunal Kapoor, Chief Executive Officer, expect the Board to support Morningstar’s strategic initiatives including an initiative they call “Organizational Design Responsive to Changes in our Regulatory Landscape”.
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Even the German rating agencies are out of the question for most communities. Since the ratings of the leading US agencies are prescribed in the communities, the services of the German agencies are – from this point of view – dispensable. Since the municipalities have to set their own investment guidelines and do not think about the local agencies, the smaller competitors of the US market leaders are left out.
Section 108, paragraph 2 of the Hessian Municipal Code (HGO) obliges the municipality to ensure sufficient security in the context of the careful and economic management of its assets when investing money, whereby it should bring in an appropriate return.
In doing so, the municipality has to minimize financial risks; speculative financial transactions are prohibited. They are legally obliged to do so in accordance with section 92 (2) sentences 2 and 3 HGO. The financial budget of the municipality is to be managed thriftily and economically. The community has to minimize financial risks. Speculative financial transactions are prohibited.
Deposits are compatible with Section 92 (2) HGO and Section 108 (2) HGO if the municipalities ensure that the security takes precedence over the possible return. The assets are to be managed carefully and economically and properly accounted for. Sufficient security is to be ensured for financial investments; they should bring a reasonable yield.
This principle must also be observed in times of low and negative interest rates. As of October 1, 2017, municipal deposits will no longer be protected by the voluntary deposit protection fund at private banks. Deposits existing as of October 1, 2017 are grandfathered.
The deposit protection instruments of the Savings Banks Finance Group and the cooperative banks also do not offer any protection for public sector deposits. Nevertheless, there is a lower risk here due to the institutional security. With the abolition of grandfathering, deposits at private banks have become less secure. However, they are not to be described as speculative.
The Hessian municipalities have to issue investment guidelines for investments before they are deposited. These regulate the security requirements, the administration of financial investments by the municipality and the regular reporting obligation.
The guidelines are to be decided by the local authority and are to be made known to the supervisory authority. The investment guideline of a Hessian municipality is only valid for investments that are made after the entry into force. Existing financial investments made on the basis of the investment guidelines of the Hessian Ministry of the Interior and Sports on municipal investment transactions and derivative financial transactions (StAnz. 2009, p. 701), which have expired, remain unaffected by these provisions.
As the State’s highest-ranking administrative authority, the Ministry is not only involved in government activities, but is also in charge of the legal and technical supervision of the States institutions that come under this department. The tasks of the Ministry of the Interior comprise for example the departments of security, municipal affairs and general affairs of the Interior and Sports.
Due to these requirements, the municipal statutes for investing their liquid funds are based on model guidelines, which usually contain the following provisions:
If the municipality intends to invest in credit institutions that are not subject to any deposit guarantee or institution protection, it must inform itself particularly carefully. In particular, the credit institution’s rating should be used as a guide.
When it comes to investing liquid funds, the municipality generally limits itself to the following forms of investment:
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Funds available according to the provision listed in “Information from the Hessian Ministry of the Interior on investments and deposit protection” of May 29, 2018 can be invested in shares in investment funds within the meaning of the Investment Modernization Act (Investmentmodernisierungsgesetz). The aforementioned requirements have already been reported here in Part 1.
The investment funds may:
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In further blog posts we will explore the implications for the credit rating agencies.
Section 108 (2) of the Hessian Municipal Code (Hessische Gemeindeordnung, HGO) obliges the municipality to ensure sufficient security in the context of the careful and economical management of its assets when making investments, whereby investments should bring a reasonable yield.
In doing so, the municipality has to minimize financial risks; speculative financial transactions are prohibited (section 92 (2) sentences 2 and 3 HGO). What appears to be a clear term for laypeople, turns out to be a difficult theoretical problem here. There is no general legal definition of what is speculative. Speculation is often accepted when there is only an asymmetrical distribution of information, i.e. an investment and achievable investment success appear certain to some investors, but other investors do not have this information to recognize the security of the investment.
Deposits are compatible with Section 92 (2) HGO and Section 108 (2) HGO if the municipalities ensure that the security takes precedence over the possible return. This principle must also be observed in times of low and negative interest rates. Since even the concept of risk is not clearly defined, these formulations are also associated with a number of uncertainties
As of October 1, 2017, municipal deposits will no longer be protected by the voluntary deposit protection fund at private banks. Deposits existing as of October 1, 2017 are grandfathered. These changes should also play a role in the Greensill scandal of 2021. Later deposits at the Greensill Bank remained unprotected.
The deposit protection instruments of the Savings Banks Finance Group and the cooperative banks also do not offer any protection for public sector deposits. Nevertheless, there is a lower risk here due to the institutional security. Both banking groups have very good ratings from all leading recognized credit rating agencies.
With the abolition of grandfathering, deposits at private banks have become less secure. However, they are not to be described as speculative.
Against this background, the following information of the Hessian Ministry of the Interior was provided for the investment of liquid funds by municipalities (municipalities, towns and districts):
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ESMA Chair, Verena Ross, takes a look at the rating market structure today, and sees that there are 24 CRAs in the EU registered with ESMA, located in 13 different Member States. She delivered a keynote speech at the European Association of Corporate Treasurers (EACT) Summit. Verena Ross spoke, among other things, about Credit Rating Agencies (CRA) supervision – including Environmental, Social, and Governance (ESG) ratings.
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The European Securities and Markets Authority (ESMA) published its “Final Report” with “Guidelines on Disclosure Requirements for Initial Reviews and Preliminary Ratings“. The purpose of these Guidelines is to deliver guidance that will address inconsistencies in the application of these requirements by Credit Rating Agencies (CRAs), and by extension reduce the risks that are posed by rating shopping to the extent it is possible under the existing provisions of the CRA Regulation.
ESMA has conducted a public consultation on these Guidelines in order to gather the views of CRAs and other relevant stakeholders. A number of amendments and clarifications have been introduced into the final guidelines in order to take account of the views expressed during this consultation.
In one of the answers it was noticed that ESMA’s proposal assumes good behavior on the part of the issuer, although it is precisely about the cases in which an issuer hides a poorer rating. The rating can refer to a shelf registration or any other vehicle with a different LEI or an instrument with a different ISIN, which can be legally differentiated, but represent the same economic risk. These cases are particularly difficult to grasp when the greedy rating agency also collaborates on behalf of the issuer against competing agencies.
“However,” writes ESMA, “a number of respondents raised specific concerns over the provision of an LEI or ISIN for each disclosed instance. Specifically, one respondent outlined that not all entities currently have an LEI/ISIN and that this can depend on the maturity of the entity seeking a rating, its industry, or the stage of the considered transaction.” To address this issue, it was advocated to replace a missing LEI by the “reporting company’s unique key“ or unique rating identifier, as reported to ESMA under Commission Delegated Regulation (EU) 2015/23, while other respondents advocated for the exclusion of initial assessments for which an LEI and/or ISIN had not been provided from the proposed disclosures. This was on the basis that it would be difficult to monitor other CRAs’ public disclosures to assess whether that CRAs provided an initial review or preliminary rating for that same transaction.
Concerning the LEI or ISIN, ESMA now considers that it is not a point that needs to be populated in the disclosure if that information is not available to the CRA at the time of making the disclosure. “However, the CRA should back-fill this data point on subsequent publications when this data becomes available to the CRA”, writes ESMA.
In its public consultation, ESMA asked whether respondents agree that ESMA’s proposed timing of disclosures would better enable investors and the market to identify where rating shopping may have occurred. The wise choice of the timing of publications is a differentiating factor between the rating agencies. Investors and issuers prefer agencies that know how to choose their publication times sensibly. Rating agencies compete with each other to choose the wisest possible time for publication, for example before or after the market closes, before, after or at the same time as other notifications, etc. It takes many years of experience to understand the complex constraints and interests of issuers (and their boards and shareholders), banks, law firms, auditors, rating advisors, institutional and private investors, etc.
According to ESMA’s evaluation of responses, one respondent agreed that the proposed timing of these disclosures will better enable investors and the market to identify where rating shopping might have occurred, on the basis that “since all CRAs will publish an updated list on the same day of each month, it should enable investors to check the issuers and issuances”. Another respondent questioned whether the uniformity of dates would create a risk of a race to the bottom in terms of timing.
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The state specification of the number of customers and the limitation of the number of customers who – regardless of market demand – are allowed to use certain services, are typical features of a central administration economy in times of financial repression.
On October 5th, 2021, the Federal Financial Supervisory Authority (BaFin) ordered N26 Bank GmbH to take measures to restore proper business organization and to contain risks to operational resilience. A special representative appointed by BaFin will monitor the implementation of the measures ordered.
Specifically, BaFin has ordered the elimination of deficiencies, particularly in risk management in the areas of information technology and outsourcing management. The implementation must take place within a specified period.
The shortcomings in risk management are due to the strong growth of the bank, writes BaFin. In accordance with Section 45b (1) sentence 1 of the German Banking Act (KWG), BaFin has ordered risk minimization measures that limit customer growth and certain risk positions.
The growth in new customers of N26 Bank GmbH will be materially reduced and will be limited to 50,000 new customers per month. In addition, the exposure value on risk positions secured by real estate may not exceed EUR 500,000,000. This limit includes all countries in which N26 Bank GmbH is active.
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According to the Basel Framework as it will appear in the future on January 1, 2025, banks incorporated in jurisdictions that allow the use of external ratings for regulatory purposes will assign to their rated bank exposures the corresponding “base” risk weights determined by the external ratings according to the following table:
External Credit Risk Assessment Approach
| External rating of counterparty | AAA to AA– | A+ to A– | BBB+ to BBB– | BB+ to B– | Below B– |
| “Base” risk weight | 20% | 30% | 50% | 100% | 150% |
| Risk weight for short-term exposures | 20% | 20% | 20% | 50% | 150% |
“Such ratings must not incorporate assumptions of implicit government support, unless the rating refers to a public bank owned by its government. Banks incorporated in jurisdictions that allow the use of external ratings for regulatory purposes must only apply SCRA for their unrated bank exposures, in accordance with CRE20.21.”
This requirement contradicts the longstanding practice of leading rating agencies. Moody’s said in their banks’ rating methodology “our approach to incorporating our expectations related to various forms of external support, from affiliated entities, or from governments, based upon our Joint Default Analysis (JDA) framework.”
The requirement, that “such ratings must not incorporate assumptions of implicit government support, unless the rating refers to a public bank owned by its government”. The demand not only implies a disadvantage for private banks, which, due to their successful development and importance for the economy, can also count on political support. From an investor’s point of view, too, it is important to assess the default risk, including all aspects that are relevant for the classification of the probability of default. This also includes the assessment of the actions of politicians.
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“Transparency Reports” of credit rating agencies (CRAs) are published in accordance with Article 12 and Annex I, Section E.III of the EU Regulation on Credit Rating Agencies:
Rating agencies are therefore obliged to disclose their transparency reports in order to enable everyone to obtain certainty about the functioning of the rating agency. Unfortunately, the reports are not always easy to find. Therefore, the following lists can be found with all links to the current reports.
In one case, the report cannot be found by normal search engines, but it is stored in such a way that the supervisory authority, the European Securities and Markets Authority (ESMA) can be shown a link which, however, is normally not found by internet users. The link to the missing report can be found in the following lists.
With one of the registered credit rating agency, however, there is a clear violation of the CRA Regulation in the European Union:
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There is a page that lists transparency reports, but all the links are broken and do not allow the alleged transparency reports to be downloaded. It makes no difference whether you search in German or in English. The mandatory reports are not available in neither German nor English. The violation relates not only to the most recent report, but also to previous years and other mandatory reports of the same credit rating agency. The reports, which are so important for investors and issuers, are permanently unavailable. The lack of reports is not due to temporary maintenance.
In this case it is again evident that the European supervisory authority is apparently working too slowly to punish such violations. The deficiency could be remedied by simply uploading the reports. It has been shown that it can sometimes take ESMA several years to punish a violation of the EU regulation on rating agencies. That is too late to allow market participants an up-to-date insight.
A leading American rating agency has its transparency reports ready with confusing labels. The “Transparency Report 2020” shows what is actually a transparency report for 2019. The right Transparency Report 2020 is also available, but in a different place and with a different link. This can lead to the erroneous use of this data in statistical evaluations. We have an example of this.
The following documentation proves the incorrect and misleading designations. Here is the wrong link first:
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The following links led to the correct files – with the one exception mentioned above – on Friday, September 17th, 2021:
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Now it is official: In the city of Mohnheim no failure of the administration could be determined before and in the insolvency of Greensill Bank in Bremen. The responsibility is put on the “investment grade” rating, which was issued by a local rating agency in Berlin. In politics, efforts are made to limit the damage. The top German overseer, responsible for the biggest losses since World War II, is running for the Chancellery.
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The misleading self-presentation of a local credit rating agency in Hamburg raised the question of what kind of representations are allowed.
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The Federal Financial Supervisory Authority (BaFin) in Germany received monthly reports from Greensill Bank AG (Greensill Bank) about the bank’s balance sheet data from January 2019 on. This is evident from the answer given by Parliamentary State Secretary Sarah Ryglewski on March 12, 2021 to written questions from members of the German Bundestag (Drucksache 19/27704). Greensill Bank’s total assets increased rapidly in 2019 from EUR 763 million at the beginning to EUR 3.8 billion.
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On March 3, 2021, BaFin finally issued a ban on the sale and payment of the bank due to the threat of over-indebtedness. The bank had to close for business with customers. BaFin prohibited it from accepting payments that were not intended to repay debts to the bank (moratorium). In addition, the BaFin filed criminal charges against the board members of Greensill Bank.
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Cologne-based GBB-Rating, a company of the Auditing Association of German Banks, offers credit ratings with a price / performance ratio challenging its US peers. It is approved by the European Supervisory Authorities (ESAs) as an External Credit Assessment Institution (ECAI) for commissioned and unsolicited ratings for the calculation of capital requirements according to BASEL III / IV, CRR and Solvency II Directive. GBB-Rating is supervised by the European Securities and Markets Authority (ESMA) in Paris, which is responsible for all credit rating agencies in the European Union (EU).
The following graphic shows how GBB-Rating (i.e. GBB-Rating Gesellschaft für Bonitätsbeurteilung mbH) is embedded in the relationships between the associations and their subsidiaries:
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The following graph shows active relations and historic relations of managing directors, authorized officers, shareholders and the number of ative or historic relations to other companies:
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Since 1996, GBB-Rating has been active on the German market and increasingly also internationally in other European countries for ratings and credit assessments. With more than 20 rating analysts and around 220 ratings and benchmarking of financial services institutions every year, GBB-Rating is one of the local agencies in Germany and Europe. In the 2018 financial year, an average of 35 employees – excluding managing directors – were employed. The focus of their work is in the financial services sector with particular expertise in assessing banks, building societies and leasing companies. They have also been offering Pfandbrief ratings since 2020.
Assigned ratings and rating reports provide a decision-making basis for management and shareholders, a strengths / weaknesses analysis as a basis for determining the position, starting points for improving opportunity / risk management and monitoring the success and risk factors. The credit rating serves as a negotiating argument for business and refinancing partners as well as an image-promoting marketing tool.
Medium-sized and smaller leasing companies in particular can benefit from a recognized rating when opening up new sources of refinancing at credit institutions and, if necessary, realize advantages or savings potential in the (future) calculation of equity requirements (“leasing risk weight”) through more favorable risk weights.
GBB-Rating offers many years of expertise in the development, backtesting and validation of risk classification procedures (scoring) and data analysis and methodological support for risk management.
Among their services are:
Funds are maintained by the banks in such a way that all banks belonging to the deposit protection fund pay in a certain amount annually. The contribution to be made by each bank depends on the company’s turnover and creditworthiness. In Germany, GBB-Rating is commissioned to assess the risk in the private deposit insurance fund. In the statutory deposit insurance scheme, regulatory ratios and external ratings are used as scalar factors.
The voluntary deposit protection fund of the Federal Association of German Banks was founded in 1976 and today exists alongside the statutory compensation scheme of German banks that has existed since 1998.
With the voluntary security fund of the private banks, there was a security limit until December 31, 2014, which is 30% of the relevant liable equity of the respective bank per creditor. In the case of a bank’s liable equity capital of, for example, 100 million euros, the assets of each individual customer are secured with up to 30 million euros, provided the fund has the appropriate funds. The protection limit will be gradually reduced: From January 1, 2015, the protection limit per creditor will be 20%, from January 1, 2020 initially 15% and from January 1, 2025 then 8.75% of the bank’s liable equity capital, which is relevant for deposit protection.
It is crucial for bank customers that banks must inform their customers before opening an account whether or not they belong to the deposit protection fund, Section 23a of the German Banking Act. Today this query can also be carried out online at the Association of German Banks.
The protection of the voluntary deposit protection fund begins where the statutory protection of the compensation scheme of German banks ends. In the event of the insolvency of a participating institution, the deposit protection fund takes over the parts of the deposit that exceed the EUR 100,000 limit up to the respective protection limit.
The People’s Bank of China issued a Draft for comments on “Measures for the Administration of Credit Investigation Services“. It is intended to regulate the credit investigation business and related activities, and promote the healthy development of the credit investigation industry. This is formulated in accordance with the “Civil Code of the People’s Republic of China”, “The People’s Bank of China Law of the People’s Republic of China”, “Regulations on the Administration of Credit Investigation Industry” and other laws and regulations.
Who is affected?
These Measures shall apply to individuals, enterprises, institutions and other organizations that carry out credit investigation services and related activities within the territory of the People’s Republic of China, but these Measures are also applicable to the credit investigation business and related activities of residents of the People’s Republic of China (natural and legal persons) outside the People’s Republic of China.
The term “credit information” refers to various types of information used to determine the credit status of individuals and enterprises by providing services for financial and economic activities. Personal and corporate identity, address, transportation, communication, debt, property, payment, consumption, production and operation, fulfillment of legal obligations and other information, as well as analysis and evaluation of the credit status of individuals and companies based on the foregoing information information are all considered to be “credit information”.
When engaging in credit investigation business and related activities, the lawful rights and interests of information subjects shall be protected in accordance with the law, information security shall be protected, and the leakage and abuse of credit information shall be prevented. Engaging in credit investigation business and related activities shall follow the principles of independence, objectivity, and impartiality, and shall not make discriminatory arrangements that violate social public order and good customs, and shall not provide exclusive services with the help of an advantageous position.
The collection of credit information by credit reporting agencies in China shall follow the principle of “minimum and necessary” and shall not collect excessively.
Credit reporting agencies shall not collect credit information in the following ways:
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When collecting credit information, credit reporting agencies shall review the business legitimacy, information sources, information quality, information security, and authorization of information subjects of the information providers to ensure the legality, accuracy and sustainability of the collection of credit information.
Credit reporting agencies in China shall clarify their respective rights and obligations with information providers in terms of data correction, objection handling, and information security. The People’s Bank of China expects credit reporting agencies operating personal credit reporting services to formulate plans for collecting personal credit information, and report to the People’s Bank of China on matters such as the collected data items, the correlation with credit, and the protection of information subjects’ rights and interests.
The collection of personal credit information by a credit reporting agency shall obtain the consent of the information subject, and clearly inform the information subject of the purpose, source and scope of the collection of credit information, as well as the possible adverse consequences of not agreeing to the collection of information. Where a credit reporting agency obtains personal consent through an information provider, the information provider shall clearly inform the information subject of the name of the credit reporting agency. When collecting non-public corporate credit information, credit reporting agencies shall adopt appropriate methods to obtain the consent of the enterprise. The collection of credit information related to the performance of duties by corporate directors, supervisors, and senior executives by credit reporting agencies shall not be regarded as personal credit information.
Credit reporting agencies shall follow the principle of objectivity in sorting, storing, and processing credit information and shall not tamper with the original data. If a credit reporting agency finds information errors in the process of sorting, storing, and processing credit information, if the information provider reports an error, it shall promptly notify the information provider to correct it; if it is an internal processing error, it shall promptly correct it, and improve the internal processing flow.
The retention period of bad personal information collected by credit reporting agencies in China shall be 5 years from the date of termination of bad behavior or incident. When bad credit information expires, the credit reporting agency should delete it. If it is used as sample data, it should be de-identified and moved to a non-production database for storage to ensure that personal credit information is not directly or indirectly identified. The People’s Bank of China encourages redit reporting agencies to separate personal identification information from other credit information, and implement physical isolation.
Credit reporting agencies shall take appropriate measures to conduct necessary review of the identity, business qualifications, and purpose of use of information users. They shall conduct necessary review of the network and system security and compliance management measures of information users who access the credit reporting system through the Internet, monitor the inquiries, discover violations, and stop services in a timely manner. Credit reporting agencies shall conduct necessary review of information users to ensure that information users obtain the consent of the information subject when inquiring about personal information and use it for the agreed purpose. The use of credit information provided by credit reporting agencies by information users shall be used for lawful and legitimate purposes and shall not be abused.
Information users shall use personal credit information for clear and specific purposes, and use them in accordance with the purposes agreed upon with the information subject. If they exceed the agreed purposes, they shall obtain separate consent. Information subjects can inquire about their own credit information from credit reporting agencies. If the credit reporting agencies have not collected the information subject’s information, they should clearly inform them that if they have collected the information subject’s information, they should provide the information subject with the collected information content.
Credit reporting agencies in China shall provide personal information subjects with free credit report inquiry services twice a year through various methods such as the Internet, business premises, and entrusting other institutions. If a credit reporting agency entrusts other agencies to provide free credit report query services to information subjects, it shall review the qualifications, service capabilities, safety protection facilities, and compliance requirements of the entrusted agency, and be responsible for the entrusted agency’s inquiries and leaks by joint and several liability.
The subject of personal information in China has the right to request a complete credit report from the credit bureau. The content of credit reports provided by credit reporting agencies to individuals shall not be less than the content of credit reports provided to information users. Credit reporting agencies in China shall not charge information subjects for the reason of deleting bad information or not collecting bad information.
Where credit reporting agencies provide credit information inquiry products and services such as credit reports, they shall objectively display the content of the inquired credit information, and explain the content of the inquired credit information and professional terms. If a credit reporting agency provides a credit report product, the content of the report shall include the information user’s inquiry records, objection marks, and information subject statement. Credit reporting agencies that provide evaluation products and services such as portraits, scoring, rating, etc., shall establish evaluation standards, and must not use elements that are not related to the credit of the information subject as evaluation standards. Where a credit reporting agency provides personal credit evaluation services, all data used for evaluation shall be displayed in the credit report provided to the information subject. Credit reporting agencies shall disclose the scoring methods and models used in personal credit evaluation products, and the degree of disclosure shall be limited to reflecting the credibility of the evaluation.
If credit reporting agencies provide corporate entities or debt credit rating services, they shall comply with relevant management regulations on credit rating businesses. Where credit reporting agencies provide anti-fraud products and services, they shall establish standards for identifying fraudulent credit information.
Credit reporting agencies providing credit information inquiry, credit evaluation, and anti-fraud services shall report the following matters to the People’s Bank of China or its branches above the provincial capital (capital) city center branch (hereinafter collectively referred to as the branch):
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Credit reporting agencies shall not provide the following credit reporting services and products:
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Credit reporting agencies shall formulate safety management systems involving all business activities and equipment and facilities, and adopt effective protective measures to ensure the security of credit information.
Individual credit reporting agencies and corporate credit reporting agencies that store or process the credit information of enterprises of more than 500,000 enterprises shall meet the following requirements:
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Credit reporting agencies shall ensure the safety of the operating facilities and equipment of the credit reporting system, security control facilities and APPs and other mobile internet terminals, do a good job in daily operation and maintenance management of the credit reporting system, and ensure the physical security of the system, network security, and host security, application security, data security and client security, prevent data loss and destruction, and prevent illegal intrusion into the credit investigation system.
The credit reporting agency shall do a good job in personnel safety management in terms of personnel recruitment, personnel leaving, personnel assessment, safety awareness education and training, and external personnel visit management. Credit reporting agencies shall strictly limit the authority and scope of staff who inquire about and obtain credit information, and they shall establish operating records for staff inquiring and obtaining credit information, and clearly record the time, method, content and purpose of staff inquiring and obtaining credit information.
Credit reporting agencies shall establish an emergency response system. When major credit information leaks occur or are likely to occur, they shall immediately take necessary measures to reduce the harm and report to the People’s Bank of China and its local branches.
For credit reporting agencies to carry out credit reporting services and related activities in China, the production database and backup database shall be located in China. Credit reporting agencies that provide personal credit information abroad shall comply with the provisions of national laws and regulations. Credit reporting agencies providing corporate credit information inquiry services overseas should review the identity and purpose of information users, ensure that credit information is used for reasonable purposes such as cross-border trade and financing, and provide it in a single inquiry. Credit reporting agencies shall not transmit the credit information of batch enterprises in a certain region or industry to the same information user overseas. Credit reporting agencies that provide corporate credit information overseas should file with the People’s Bank of China. If a credit investigation agency cooperates with an overseas credit investigation agency, it shall file with the People’s Bank of China after the cooperation agreement is signed.
Credit reporting agencies shall disclose the following matters to the public and accept social supervision:
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On January 11, 2021 the People’s Bank of China announced the “Administrative Measures for Credit Investigation (Draft for Comment)”. This is another heavy new regulation that the credit reporting industry will usher in after the 2013 “Regulations on the Administration of Credit Investigation Industry” and the “Administrative Measures for Credit Investigation Institutions”.
The “Measures” have seven chapters and 46 articles, which stipulate the scope, collection, sorting, storage, processing, provision, use, safety, cross-border flow and business supervision and management of credit information, clearly define credit information, and emphasize the need to strengthen personal rights and protect the rights and interests of corporate information subjects to ensure information security.
“The “Measures” can be said to have come out after a lot of calls, and the market is paying great attention to it.” Su Xiaorui, a senior researcher at the Ma Dai Research Institute, said that in recent years, the Internet ecology has been enriched, and the dimensions of personal credit data have been extended, such as online shopping, social relations, travel status, financial holdings, etc., but these data are mostly controlled by internet giants, and it is urgent to regulate the collection and use of data.
The development of credit investigation industry in the era of digital economy calls for new regulations. The “Measures” are intended to better adapt to the development trend of the credit investigation industry in the digital economy era. In fact, every time the relevant laws and regulations of the credit investigation industry are released, they are closely related to the actual situation of market development.
Since the establishment of the Credit Information Center of the People’s Bank of China in 2006, the construction of the country’s credit information system has entered a stage of steady progress. After years of deliberation and research, on March 15, 2013, the country’s first credit reporting industry regulation, the “Regulations on the Management of Credit Reporting Industry,” was officially implemented. The “Regulations” apply to the collection, sorting, preservation, and processing of personal or corporate credit information within China, and credit investigation services and related activities provided to information users. The target of the regulation is mainly the business activities of credit reporting agencies and the supervision and management of credit reporting agencies.
In the same year, in accordance with the “Regulations”, the People’s Bank of China issued the “Administrative Measures for Credit Investigation Institutions”, which refined and clarified the market access of individual credit investigation institutions and their filing conditions. Since then, the People’s Bank of China has been continuously researching and looking for the right time to issue the “Credit Investigation Management Measures.”
In the era of digital economy, credit investigation is facing new challenges. The introduction of the “Measures” can better meet the needs of digital economy development under new technological conditions and increase the effective supply of credit investigation. Technologies such as blockchain, cloud computing, and big data have made it easier to collect and process a large amount of data involving credit information. Credit investigation services are gradually expanding from bank credit to commercial credit and credit-related alternative data fields in China.
It is in the above context that the promulgation of the “Measures” has begun to accelerate. On the one hand, the introduction of the “Measures” can better meet the needs of financial innovation and inclusive finance. Households without credit records, “white households” or “quasi-white households” (mainly small and micro enterprises, individuals who just worked) lacking credit records were mostly due to information asymmetry. It is difficult to enjoy normal financial services for these groups, Therefore, non-credit alternative credit data will play a greater role.
On the other hand, the “Measures” also strengthened the protection of personal information, taking into account information security and information compliance. In the development process of the credit investigation industry, some new phenomena have also attracted great attention from all walks of life. Due to the lack of clear business rules for credit investigation in new business models, problems such as unauthorized collection and inadequate protection of information subjects’ rights and interests have emerged. To fundamentally solve the above-mentioned problems, it is necessary to “correct the roots” from the legal level.
In addition, the promulgation of the “Measures” is also to meet the needs of opening up. The “Measures” clearly stipulate the overseas credit investigation business and related activities for residents of the People’s Republic of China, and the cross-border flow of credit information, which is an effective supplement to the previous regulations.
One of the highlights of the “Measures” is that it clarifies what is credit information. The understanding regarding identity, data on payment transactions, property, and whether social information and other data belong to credit information is not uniform. In addition, with the rapid development of science and technology, information has broken through traditional cognitions in terms of definition, circulation, and transactions. In practice, credit information has already broken through the scope of lending information.
In accordance with the principle that substance is more important than form, the “Measures” include all types of information that provide services for financial and economic activities. Information used to determine the credit status of individuals and enterprises, including but not limited to: personal and enterprise identities, addresses, transportation, and communications., debt, property, payment, consumption, production and operation, fulfillment of statutory obligations and other information, as well as analysis and evaluation of information based on the aforementioned information on the credit status of individuals and enterprises, are all regarded as credit information. All activities that collect, organize, store, and process credit information and provide it to information users are all credit investigation services and must be included in the Chinese credit investigation supervision.
It is worth noting that some information belongs to the category of personal privacy, and even licensed credit reporting agencies cannot obtain and call relevant information at will. The information can only be collected when the information subject is fully informed of the possible adverse consequences of the collection and use, and sufficient authorization has been obtained, such as property information; including religious beliefs, genes, fingerprints, blood types, and diseases. Such personal privacy information as well as information prohibited by laws and regulations from being collected fall into the category of strictly prohibited collection, and credit reporting agencies shall not collect it.
Clarifying what is credit information will help prevent personal information from being excessively collected, improperly processed and illegally used, and will help improve the transparency of credit investigation business activities: Follow the “minimum, necessary” principle and strengthen the protection of information subjects’ rights and interests.
Profiling and evaluations of individuals using personal credit information” are all credit investigation services, which means that personal information services provided by some large internet platform companies will also be included in credit investigation.
At present, there are some big data risk control companies and data service providers under the banner of credit investigation in the market, and there are many large internet platform companies. These companies take advantage of the market and do not have sufficient authorization. These institutions wander the legal boundaries, but in fact they are not subject to corresponding supervision. With one-time authorization, infinite collection, and unlimited use, opaque processing, and the lack of objective and fairness in automated decision-making, the right to know, consent, and dissent cannot be guaranteed.
In response to the above problems, the “Measures” put forward the principle of “minimum and necessary” information collection around the links of credit information collection, sorting, storage, processing, provision and use, and clearly inform the information subject and obtain consent, and use it for legal purposes. It helps protect the legitimate rights and interests of information subjects and realize the safe, compliant and reasonable flow of credit information.
For the restricted area of information collection, the “Measures” also clearly stipulate that agencies are not allowed to deceive, coerce, induce, collect fees from individuals or companies, collect from illegal channels, or otherwise infringe the legal rights and interests of the information subject to collect credit information.
In addition to regulating the domestic credit investigation business, the “Measures” also make clear provisions on the cross-border flow of credit information. This is seen as an inevitable requirement for building an open economy. As an integral part of the modern financial system, expanding the opening up of the Chinese credit investigation industry is an important part of implementing the financial opening up strategy. Moreover, with the introduction and implementation of the “Belt and Road” initiative, the economic and trade between China and the countries along the “Belt and Road” are getting closer and closer. Chinese enterprises investing cross-border all require cross-border exchanges and cooperation of credit information.
In previous laws and regulations, there was no clear provision for this part. With the “Measures” released, cross-border credit information flow and cooperation are expected to break. According to Article 24 of the “Regulations”, the sorting, storage and processing of information collected by credit reporting agencies in China shall be carried out in China. Credit reporting agencies that provide information to overseas organizations or individuals shall abide by laws, administrative regulations, and relevant regulations of the credit reporting agency under the State Council of the People’s Republic of China.
In this regard, the “Measures” emphasize that these measures are also applicable to the credit investigation business and related activities of residents (natural and legal persons) of the People’s Republic of China outside the People’s Republic of China.
At the same time, the “Measures” have made clearer regulations on cross-border flows of credit information. For example, if a credit investigation agency provides corporate credit information inquiry services overseas, it shall ensure that the credit information is used for reasonable purposes such as cross-border trade and financing, and provide it in a single inquiry manner. It is not allowed to transmit bulk credit information to an individual user overseas. Credit reporting agencies that provide overseas corporate credit information inquiries or which are cooperating with overseas credit reporting agencies shall file with branches above the central branch of the provincial capital of the People’s Bank of China.
The European Union (EU) and Financial Action Task Force (FATF) lists countries with deficits in the fight against money laundering, terrorist financing and the financing of proliferation. The lists have far-reaching implications for country ratings and especially for ratings of financial service providers. FATF publishes a consolidated table of assessment ratings.
On the basis of Article 9 of the Fourth Money Laundering Directive (EU) 2015/849, the European Commission has defined third countries with high risk in the Delegated Regulation (EU). It includes the following countries: North Korea, Iran, Afghanistan, Bahamas, Barbados, Botswana, Ghana, Iraq, Jamaica, Yemen, Cambodia, Mauritius, Mongolia, Myanmar / Burma, Nicaragua, Pakistan, Panama, Zimbabwe, Syria, Trinidad and Tobago, Uganda and Vanuatu.
Legal consequences and measures of the German Federal Financial Supervisory Authority (BaFin) with regard to the listed countries with increased risk differ and follow this rating:
As before, Albania, which is only listed in the FATF statement on “Jurisdictions under Increased Monitoring” and not in the Delegated Regulation, Albania has no immediate obligations to act and no additional due diligence or organizational obligations need to be fulfilled. Nonetheless, when assessing the country risk in the context of the prevention of money laundering and terrorist financing, the situation in Albania and / or people from Albania should be given due consideration, explains BaFin; otherwise, BaFin refers to the Deutsche Bundesbank and the national risk analysis.
For the first time, the European Securities and Markets Authority ESMA has reported a decline in market shares in Europe for both of the major US rating agencies. The authority thus discloses a remarkable development. Never before have the two market leaders, who have been issuing their credit ratings worldwide according to recognized standards and criteria for around 100 years, had to give up market shares in favor of agencies that have their headquarters in Europe.
In addition to European agencies, the winners include competitors of the two market leaders Standard & Poor’s and Moody’s in the USA, namely Fitch Ratings with a market share that has increased from 16.62% to 17.55%, and DBRS Ratings, with a market share of 2.46% which increased to 2.99%. The Canadian DBRS Ratings was taken over by Morningstar, a US rating agency that is the undisputed leader in the rating of mutual funds. The insurance specialist A.M. Best Rating Services could also increase its market share, from 0.82% to 0.95%. A.M. Best Rating Services shows, how the decades-long focus on the insurance industry pays off in order to be increasingly perceived in the market as a Credit Rating Agency (CRA). All five agencies named are controlled by parent companies in the United States.
According to the European Securities and Markets Authority ESMA, the largest rating agencies domiciled in Europe still do not each have a full percentage point market share of the European rating market. The largest rating agencies with roots in Europe are the Italian-based Cerved Rating Agency and The Economist Intelligence Unit, which belongs to the Economist Group in London. While the Italian agency, which also offers its services in the European Union, improved from 0.81% to 0.84%, The Economist Intelligence Unit suffered a market share loss from 0.87% to 0.79%. However, this should be understood against the background that The Economist Intelligence Unit shows a clear focus on micro and macroeconomic research and is known for country ratings, i.e. not for ratings for issues and issuers from the group of industrial companies, financial service providers – i.e. banks in particular and insurance companies – and does not compete in the rating of asset-backed securities, etc. The bottom line is that practically nothing has changed in the market shares of the two largest European agencies in the overall European market.
Among the five types of credit ratings distinguished by ESMA, The Economist Intelligence Unit only offers ratings in the “Sovereign and Public Finance” sector. In the other four market segments this agency does not compete with competitors within the European Union. A.M. Best Europe Rating Services achieves its market share only through the activities of this agency in the “Corporate Non-Financial” and “Corporate Financial” market segments (the latter includes the insurance industry). The market share of Cerved Rating Agency must also be analyzed against the background that this agency only reports ratings in the “Corporate Non-Financial” segment and is not in direct competition with other competitors in the other four market segments.
Remarkable changes – if you disregard the reduction in the market shares of S&P Global Ratings Europe and Moody’s Investors Service – there are only among the “further ran”. For example, a rating agency in Berlin superseded Creditreform Rating, ranking 8th. This is remarkable because Creditreform Rating, as a subsidiary of Creditreform AG in association with the Verband der Vereine Creditreform e.V. in Germany, has a very strong brand name and can rely on over 158,000 members of the association worldwide. While Creditreform Rating only has a market share of 0.53%, previously 0.55%, the Berliners now make it to 0.62%, previously 0.49%. This corresponds to a growth in market share of more than a fifth within a year. It remains, however, that of the agencies based in Germany, the one with the largest market share only occupies eighth place in the European Union.
In contrast to A.M. Best Europe Rating Services, Cerved Rating Agency, The Economist Intelligence Unit and Creditreform Rating, Berlin’s Scope Ratings accepts rating orders from any type of issuer, including in the “Corporate Insurance” market segment that is not served by Creditreform Rating, for example. Through so-called “rating shopping”, issuers look for the agency that is best able to serve their interests. If an agency does not even offer certain ratings, the rating agency concerned cannot benefit from this earnings effect from “rating shopping”.
In contrast to all other agencies, the Berlin agency sees itself as – quote – “the leading European provider of independent credit ratings” with a market share of 0.62%. This claim is due to the tireless work over the past 20 years, which was not discouraged by the bankruptcy of the previous agency FondScope, from which today’s agency Scope Ratings emerged. Over the past two decades, the agency has not yet been able to generate profits in any year, but annual deficits have accumulated. The permanent losses are borne by a small group of well-known personalities, financially strong institutional investors and strategically motivated shareholders of rated companies.
There are no really noticeable movements among the other agencies, if one also takes into account that some agencies have given up in the meantime and thus also have given up market share. The dynamic growth of Kroll Bond Rating Agency Europe deserves special mention, as the agency increased its market share tenfold from 0.03% to 0.34%. With this market share, Kroll Bond Rating Agency Europe is now the largest rating agency ahead of all the other 17 names in the last places in Europe.
If one measures the market share not in terms of the sales achieved, but in terms of the sheer number of financial instruments for which ratings were given, an even more differentiated picture emerges. The market shares in the “Structured Finance” segment, which is so important for rating agencies, have shifted significantly in favor of Scope Ratings: While the Berlin agency only achieved a market share of 1.2% in the previous year, it was up 1.5% in 2019, while Moody’s market share fell from 59.5% to just 55%. In this market, Fitch Ratings is in second place with 44.5% (after 45.0%), S&P with a slightly increased 37.5% (after 35.8%) and DBRS with 14.3% also better than before (13.9%). According to this statistic, the market shares do not add up to 100% since the same financial instruments can be assessed by several agencies.
Anyone who already has a rating from Moody’s or S&P can afford to add the rating of a lesser-known, local agency without having to expect any disadvantages when placing the bond, especially not if a smaller agency delivers an even more favorable credit rating. An example of this is given by the issuer Grenke, who received a long-term rating of BBB+ from Standard & Poor’s, but A from GBB Rating, domiciled in Germany.
According to Article 8d of the EU Regulation on Credit Rating Agencies, the European Securities and Markets Authority ESMA is only required to calculate the market shares of the rating agencies it supervises. Therefore, there is no information in the authority’s document on the absolute basis on which the figures were calculated. Since the market shares in the EU are only calculated on the basis of the figures that must be reported to ESMA, the relevant world market shares are actually considerably lower than the EU market shares calculated by the EU authority.
If, for example, the 57 Chinese rating agencies or even the more than 200 other rating agencies worldwide based outside Europe and with no activities in the European Union market were included in the calculation, the world market shares for the 27 agencies recorded in the EU in 2019 would naturally be considerably lower.
According to Section 267, the German Commercial Code describes the size classes of companies that are exempt from certain disclosure obligations. Small corporations are those that do not exceed at least two of these three criteria: total assets of € 6 million, sales of € 12 million in the twelve months prior to the reporting date or an annual average of fifty employees; medium-sized corporations are those that exceed at least two of the three characteristics specified in paragraph 1 and do not exceed at least two of the three following characteristics: € 20 million balance sheet total, € 40 million revenue in the twelve months before the reporting date or an annual average of two hundred and fifty employees.
The agencies based in Germany – even the ones describing themselves as “leading” – do not exceed these thresholds, so that, unlike the US agencies, they are not obliged to disclose their financial statements. From this fact it can be concluded that these German agencies are located at most in the range of one thousandth of the sales volume of the market leaders S&P Global and Moody’s, especially since the German agencies – unlike the US American giants – are almost unknown in Africa, Asia and America. Moody’s, for example, has a global presence with more than 11,400 employees in 33 offices around the world and serves customers in more than 100 countries.
Moody’s Corporation recorded TTM (Trailing Twelve Months) sales of US $ 5.3 billion in the third quarter of 2020 with an operating profit margin of around 45%. S&P Global achieved even higher total sales, with a large part being generated by services beyond credit rating services. For example, S&P has secured market dominance by taking over IHS Markit for US $ 44 billion. All agencies established in Europe are far from being able to participate in these business arenas, which are important for institutional investors as well as for public and private issuers. Moody’s secured e.g. In 2017, with the takeover of Bureau van Dijk, information on around 375 million companies, so Moody’s can be considered the most important point of contact for company data.
In this respect, S&P Global Ratings with a market share of 40.40% in the EU alone (previously 42.09%) and Moody’s Investor Service with a market share of 33.12% (previously 33.39%) are unlikely to see the market share gains of the small agencies as a dangerous “game changer”, even if Scope Ratings has already collected data on hundreds of companies and has formed its own opinions on many issuers. Especially since these rating classifications from the Berlin agency hardly differ – if available – from the ratings of the market leaders, there is no disruptive effect and no reason for investors to concern themselves with these ratings. More than 70% of all sales in the recognized ratings business in the European Union remain on the books of Moody’s and S&P, and if you add Fitch Ratings, more than 90% of all payments from Europe go to these three US agencies alone .
Hardly any professional investor knows to enumerate smaller rating agencies supervised by ESMA, let alone report on their current ratings. In the practice of the financial markets, most of these small agencies really do not play any role. With a combined market share of more than 90%, the importance and role of the three leading US agencies S&P, Moody’s and Fitch Ratings are therefore still significantly underestimated, because the sales do not reflect the interests of investors, who mainly rely on the opinions of these experienced rating agencies. If a smaller credit rating agency is commissioned by an issuer to develop and disseminate a rating, this says nothing about the effectiveness of this mandate. Because of the small number of ratings issued, there is no statistical, scientifically based evidence that ratings from these small agencies bring the assessed issuer a significant cost advantage.
Since the fees charged to rating agencies by the European Securities and Markets Authority are calculated based on their business volume, the leading US agencies have an interest to report low sales volumes to ESMA. Thus their market shares in the EU appear as low as possible. Additional fees for other services are charged by their other subsidiaries. Accordingly, the market shares of the smallest agencies are overestimated, because they are not burdened with proportionally higher administrative fees from their supervisory authority when reporting higher sales. This is due to the fee table applicable to the smaller agencies. In addition, the mini-agencies have an interest in being reported with high market shares to comfort their partners or shareholders, who are plagued by ongoing losses of their rating enterprise.
The highly complex EU regulation of rating agencies, which was launched in 2009 with the aim of breaking the US oligopoly, has not changed the fact that only the leading agencies provide issuers with the required “entry ticket” to the world financial markets. Nothing has changed in their dominance – on the contrary: the market share of these three agencies, S&P, Moody’s and Fitch Ratings, was 87.02% in 2012, and now is 91.07%, even higher than it was when politicians in Europe believed that the opportunity of the financial crisis could be used to restrict the power of US credit rating agencies. After a lost decade, it is time to think about deregulation and finally to abolish the privileges granted to all agencies registered or certified in the EU.
Small and medium-sized companies have difficulties communicating their creditworthiness credibly. Recognized credit rating agencies concentrate their services on companies that go through a committee-based rating process. The legal framework in Europe offers no alternative to this. Only those who meet all the requirements of the EU regulation on credit rating agencies can be recognized as a rating agency. These requirements provide for an assessment process for which analysts are responsible, which leads to a decision by a rating committee. The agency’s supervisory and control bodies must be filled accordingly. Recognized rating agencies must have at least two independent non-executive directors on their board, provide a review function, etc.
Only personalities with many years of professional experience, academic training and aptitude of character are considered as rating analysts. Analysts are not allowed to perform sales functions for the rating agency at the same time. It is therefore necessary to appoint additional employees who are responsible for business development. All these requirements mean that the operation of a recognized rating agency is associated with considerable costs. Accordingly, the supervisory authority responsible in the EU, the European Securities and Markets Authority (ESMA), requires the rating agency to have sufficient capital to ensure the agency’s continued existence. All of these requirements mean that the traditional rating process, as required by law, is too expensive for small and medium-sized companies.
The rating process is too expensive for small and medium-sized companies, as the financial requirements are much lower than in large corporations. That already results from the definition of small and medium-sized companies. The costs of the rating process must be put in relationship to a significantly smaller financing volume.
However, the rating process is not necessarily easier for small and medium-sized companies than for large companies. Sometimes the opposite is even true: large companies are often organized similarly as corporations, have diversified business activities and compete with comparable companies with their products.
Small and medium-sized companies, on the other hand, often have specialists who offer unique products for a relatively small market. Often these companies are “hidden champions” who occupy a niche market. Their special expertise protects them against competitors. Due to the specialization and special expertise, the best small and medium-sized companies in terms of creditworthiness are often not easy to identify. For rating agencies that work in accordance with the restrictions of the EU regulation on rating agencies, there is hardly any team of analysts who have the necessary specialist knowledge in all specialist areas.
Credit bureaus therefore intervene in the movement of goods with customers and suppliers. These collect data from court registers and other public sources. However, due to the applicable disclosure requirements in the EU, this data is of limited topicality. Ratings calculated using such data are correspondingly outdated. Ratings are often determined on the basis of annual financial statements from the year before last. In addition, small companies, which can include listed companies, are not required to disclose their income statements.
These adverse conditions limit the possibilities of developing suitable rating models for small and medium-sized companies on a purely mathematical-statistical basis using the statutory mandatory publications.
Only a rating agency that works on a model basis but acts on behalf of the company assessed can lead out of this dilemma. In this case, the company has the option of providing more up-to-date and comprehensive data specifically for the purpose of credit rating. The annual financial statements prescribed by accounting law have many addressees. There is also a dependency on the tax balance sheet. For these reasons, statutory annual financial statements are not ideal for creating ratings.
According to the EU regulation on rating agencies, ratings based on a scoring model are not subject to approval by the European Securities and Markets Authority (ESMA). Since these ratings are not subject to supervision, they may not be used for certain applications. This affects banks, insurance companies and other institutional investors.
The aspects mentioned illustrate the difficulties that small and medium-sized enterprises in the EU face when it comes to rating.
At the federal and state level, there are laws on forests in Germany that must be taken into account with every rating of forest investments. The federal states regulate rights and obligations differently. In the following see the example of the Hessian Forest Act (GVBl. 2013 S. 458 vom 08.07.2013).
The aim of the Hessian Forest Act is to protect the forest as a living and economic space for humans, as a community of animals and plants and because of its effects on climate protection, to increase it if necessary, taking into account the concerns of agriculture, and to protect it from harmful effects preserve. Sustainable and orderly management of the forest is to be guaranteed and forestry promoted. The Forest Act aims to achieve a balance between the interests of the general public and the interests of forest owners.
The goals of the Forest Act are to be achieved within the framework of sustainable and multifunctional forest management. The services of the forest and forestry are to be oriented towards different aspects. This includes the environment and the foundations of human life, the natural balance, biological diversity, the landscape, the soil, and the water. The purity of the air and the local climate must be protected. The forest makes a contribution to protection against noise, soil erosion and flooding (protective function). Forests should produce renewable raw materials and be sustainably usable. In particular, wood should be supplied for material, chemical, energetic and thermal use (utility function). The largest possible amount of carbon must be bound in the forest and its wood products (climate protection function). The forest offers people a place to relax and allows them to experience nature to enjoy pure air and tranquility, to increase health and well-being, for walking and hiking, for sporting, nature-friendly activities, for environmental education and for nature-friendly tourism development (recreational function).
In particular, proper forest management is characterized by a number of characteristics:
The law requires regular forest management. It is management based on an operating plan to ensure proper forest management and sustainability. The forest owners of forests with a forest operating area of 100 hectares or more must define their forest management goals in operating plans. The operating plans are generally to be drawn up for ten years. The choice of the type of operation, the determination of wood production and its sustainability parameters is left to the forest owner, provided that this does not jeopardize the fulfillment of the basic obligations.
Bare areas, forest pelts and cleared areas with an area of more than 0.5 hectare must be reforested by the forest owner within six years through natural regeneration, planting or sowing. The forest authority can set a reasonable deadline for reforestation and order planting or sowing, provided that the forest does not naturally rejuvenate. It is forbidden to reduce coniferous wood stocks under the age of 50 and hardwood stocks under 80 years of age to less than 40 percent of the stock of the commonly used yield tables. Exceptions can be permitted by the higher forest authority if the further reduction of the stock is necessary for compelling economic, silvicultural, genetic or nature conservation reasons. Forest owners must adequately protect the forest against damage from animal and plant pests, natural events and fire.
If the forestry management of a forest area, in particular the logging and the removal of forest products, is not possible or is only possible with disproportionately great effort without the use of third-party property, the owner of the third-party property must tolerate its use. The forest owner must notify the owner of the foreign property in advance of the intended use and compensate for the damage caused by the use.
The upper forest authority in the state of Hesse can declare forests to be protective forests if it is necessary to carry out or refrain from certain forest measures in order to avert or prevent dangers, significant disadvantages or significant nuisances for the general public. In particular, the declaration on protective forests comes into consideration if the forest must be preserved in its existence and its external delimitation and if it is of particular importance for the climate, water balance, soil protection, privacy protection, noise protection or air purification.
Forest visitors have to show consideration for one another so that mutual nuisance or hindrance is avoided. The use of the forest must not disturb the community, hinder the management of the forest, endanger, damage or pollute the forest and not impair the recreation of others. Cycling, riding and driving with wheelchairs are permitted in the forest on paved or natural paths that have been laid out by forest owners or with their consent and on which safe traffic is possible with mutual consideration.
Forest can have public or private owners. Private forests can be managed in various legal forms. A community forest can acquire rights and enter into liabilities under its name, acquire, transfer and give up property and other rights in rem in movable and immovable property, and sue and be sued in court. Forest owners, whose forest operations are not suitable for independent, proper forest management, should join together to form forest operations associations.
Within the scope of the Banking Act, the notification of intent to appoint a management board member must include the material facts for an assessment of whether sufficient time is available for the performance of the related duties. Board members are required to provide detailed information on how they spend their time. It is at the discretion of the authority to decide to what extent the reported time is spent privately or professionally.
The German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht – BaFin) provides information on what information has to be provided on how a board member spends his time. It is laid down in its Guidance Notice on management board members. This is pursuant to the German Banking Act (Kreditwesengesetz – KWG), the German Payment Services Supervision Act (Zahlungsdiensteaufsichtsgesetz – ZAG) and the German Capital Investment Code (Kapitalanlagegesetzbuch – KAGB).
This information has to be provided on the form “Details of reputation, available time and additional mandates”. As a rule, BaFin assumes that a person will only accept an appointment as a management board member if he or she considers himself or herself capable of fulfilling the time requirements associated with this activity. Accordingly, this person has to conduct an overall review of all of his or her current activities and mandates and estimate the amount of time associated with this new activity.
The following guidance notes shall be complied with in notifying BaFin of whether this person has sufficient time. All activities and mandates, including the mandate subject to notification, are to be included. The time required to perform these activities and mandates is to be estimated and disclosed to BaFin as such.
All of the management board member’s full-time and part-time professional activities must be indicated. All mandates in administrative and supervisory bodies must also be included. The amount of time required for a mandate on an advisory council must be indicated if the duties and powers of this advisory council are analogous to those of an administrative or supervisory body and are regulated by law or in the articles of association or the partnership agreement.
In the case of mandates in administrative and supervisory bodies, in addition to
is to be taken into account, as is participation in committees and
The assessment shall also reflect the fact that an activity as a member of an administrative or supervisory body will also take up time outside the scope of regular meetings and that this time requirement may suddenly increase if the undertaking is faced with extraordinary situations.
As a rule, purely voluntary positions and activities which form part of the person’s private life need not be included. The private life of the board member might be carefully analyzed if there is any doubt about his ability to devote sufficient time to the task assigned to him.
A management board member shall report without delay any commencement and any termination of an activity as a management board member of another undertaking or as a member of the administrative or supervisory body of another undertaking. This notification is necessary so that BaFin is able to regularly assess compliance with the limitations of mandates under supervisory law as well as the need for the person to have sufficient time available. This notification obligation applies irrespective of whether or not individual mandates are included in the maximum number of mandates permitted.
Mandates on non-mandatory supervisory boards must also be indicated. Mandates on advisory councils must be indicated if the duties and powers of the advisory council are analogous to those of an administrative or supervisory body and are regulated by law or in the articles of association or the partnership agreement. It is also irrelevant for the notification obligation whether an activity is part-time or full-time in nature.
Where multiple mandates held by the management board member are considered to be a single mandate, this has to be documented by means of supporting statements or documents. In case of mandates held as a representative of the German federal government or the German federal states, the relevant basis in law has to be indicated or the relevant articles of association are to be appended. For an assessment of whether the member of the administrative or supervisory body has sufficient time available, the notification must provide relevant details, including the new mandate
A management board member shall report without delay any acquisition or disposal of a direct participating interest in an undertaking and any changes in the amount of this participating interest. A direct participating interest shall be deemed to be the holding of at least 25 per cent of the undertaking’s capital.
BaFin points out that a violation of the management board member’s notification obligations under the Banking Act and the Capital Investment Code will constitute an administrative offence which may result in an administrative fine of up to one hundred thousand euros. Violation of the notification requirement means failing to make a notification or making such notification incorrectly, incompletely or not in due time.
Depending on their nationality and place of residence, management board members must submit the original copy of a “certificate of good conduct for presentation to a German authority (certificate of good conduct for official purposes)” (document type “O”) issued by the Federal Office of Justice (Bundesamt für Justiz – BfJ). This document is issued in accordance with section 30 (5) of the German Federal Central Register Act (Bundeszentralregistergesetz – BZRG). Alternatively, it could be a “European certificate of good conduct for presentation to a German authority” in accordance with sections 30 (5) and 30b of the BZRG or certificates of good conduct equivalent to those named above, or certifications of reputation assessments performed by supervisory authorities in the country of residence after consultation with the relevant division of BaFin (“equivalent documents”).
The German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht – BaFin) provides information on what certificate is used to establish a bank management board member’s reputation rating in its Guidance Notice on management board members. This is pursuant to the German Banking Act (Kreditwesengesetz – KWG), the German Payment Services Supervision Act (Zahlungsdiensteaufsichtsgesetz – ZAG) and the German Capital Investment Code (Kapitalanlagegesetzbuch – KAGB).
Management board members who have resided in different countries in the previous ten years must submit certificates of good conduct and relevant documents from each country. The relevant division of BaFin has to be provided with detailed information regarding any legal obstacles to their furnishment. If the relevant documents are already available, they have to be submitted to BaFin together with the other documents to be appended to the notification of intent. However, subsequent submission is also possible.
In countries in which certificates of good conduct are issued by a public agency, other documents may not be used as a substitute. The “certificate of good conduct for presentation to a German authority” should not be confused with the “extended certificate of good conduct” referred to in section 30a of the BZRG.
Section 30a of the BZRG determines the following: An extended certificate of good conduct is issued to a person on request, if the grant is provided for in statutory provisions with reference to this provision or if this certificate of good conduct is required for professional or voluntary supervision, care, education or training of minors or an activity which, in a manner comparable to letter a, is suitable for making contact with minors. Anyone who applies for an extended certificate of good conduct must submit a written request in which the person who requests the extended certificate of good conduct from the applicant confirms that the requirements are met.
Every person who has reached the age of 14 is given a certificate on the contents of the register concerning them on request (certificate of good conduct). If they have legal representation, this is also entitled to apply. The application must be submitted in writing to the registration authority in person or with an officially or publicly certified signature. When submitting the application, the identity and, in the case of legal representation, the power of representation must be proven. The applicant and their legal representative cannot be represented by an authorized representative when submitting the application. The registration authority receives the fee for the certificate of good conduct, keeps two fifths of it and pays the remaining amount to the federal treasury.
If the person making the application lives outside Germany, they can submit the application directly to the registry authority. Sending the certificate of good conduct is only permitted to the applicant. If the certificate of good conduct is requested to be presented to an authority, it must be sent to the authority immediately. The authority must allow the applicant to inspect the certificate of good conduct upon request. The applicant can demand that the certificate of good conduct, if it contains entries, is first sent to a local court designated by him for inspection by him. The registration authority must inform the applicant of this possibility in the cases in which the application is submitted to them. The district court may only grant the applicant person access to it personally. After inspection, the certificate of good conduct is to be forwarded to the authority or, if the applicant objects, to be destroyed by the local court. A foreign applicant can demand that the certificate of good conduct, if it contains entries, is first sent to an official representation of the Federal Republic of Germany designated by him for inspection.
The management board member must submit a request for a “certificate of good conduct for presentation to a German authority” and a “European certificate of good conduct for presentation to a German authority” to his or her local registration office (Meldebehörde) (section 30 (2) sentence 1 of the BZRG) or electronically to the Federal Office of Justice (section 30c of the BZRG). German nationals who reside outside the Federal Republic of Germany may apply directly to the Federal Office of Justice as the registration authority (section 30 (3) sentence 1 of the BZRG).
To allow BaFin to allocate the certificates of good conduct which it receives to the undertaking to which the relevant management board member is to be appointed, the name of the notifying undertaking and the BAK number have to be indicated as the reference. The BAK number is a six-digit number which BaFin assigns to each institution for internal classification purposes. It forms part of the BaFin reference number under which correspondence with an institution is registered and is listed in BaFin’s database of undertakings as the “ID”. BaFin is responsible for issuing and publishing a BAK number. The BAK number of an institute can be found on the website of the Federal Financial Supervisory Authority (www.bafin.de).
The certificate of good conduct for official purposes must be up-to-date, i.e. at the time of notification of intent it may not be more than three months old. The date of the document’s issue will be key for this purpose.
In the event that a certificate of good conduct is to be used within BaFin for further checks as to the reputation of a person, this document may not be more than twelve months old. The Federal Office of Justice will send both the “certificate of good conduct for presentation to a German authority” and the “European certificate of good conduct for presentation to a German authority” directly to BaFin. There is no need to request additional copies for the Deutsche Bundesbank or the auditing association, in the case of credit institutions that are members of one.
The German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht – BaFin) provides some insights into what kind of data is used to establish a bank management board member’s reputation rating in its Guidance Notice on management board members. This is pursuant to the German Banking Act (Kreditwesengesetz – KWG), the German Payment Services Supervision Act (Zahlungsdiensteaufsichtsgesetz – ZAG) and the German Capital Investment Code (Kapitalanlagegesetzbuch – KAGB).
On the form “Details of reputation, available time and additional mandates“, the management board member has to issue a personally signed and dated declaration providing information on any criminal proceedings and proceedings for administrative offences, decisions under trade law and insolvency or enforcement proceedings. The declaration need not include previously pending criminal proceedings that were terminated for lack of sufficient evidence to support the suspicion of a criminal offence. The same is true in the event that the proceedings were terminated because of a procedural bar.
The declaration need not include previously pending criminal proceedings which resulted in an acquittal or by virtue of which an entry in the Federal Central Criminal Register (Bundeszentralregister – BZR) was deleted or cancelled, or that are not required to be disclosed according to section 53 of the German Federal Central Register Act (Bundeszentralregistergesetz – BZRG).
Section 53 of the Act on the Central Criminal Register and the Educative Measures Register determines convicted person’s duty of disclosure: Convicted persons may refer to themselves as having no previous convictions and need not disclose the facts on which a conviction was based if the conviction does not have to be included in the certificate of good conduct or only in a certificate of good conduct in accordance with section 32 (3) or (4) BZR or is to be deleted. Insofar as courts or authorities have a right to the unrestricted disclosure of information, convicted persons may derive no rights from subsection (1) no. 1 vis-à-vis them if they are instructed about this fact.
Entries which must be deleted from the Central Trade and Industry Register under section 153 of the German Industrial Code (Gewerbeordnung – GewO) need not be mentioned. Section 153 determines that certain entries have to be deleted after a period of time of three years if the amount of the fine does not exceed 300 euros or five years in the other cases. If the register contains several entries, the deletion of an entry is only permissible if the period has expired for all entries. An entry to be deleted will be removed from the register one year after the requirements for the deletion have been met. During this time, no information may be given about the entry. If the entry in the register has been deleted or if it is to be deleted, the administrative offense and the fine decision may no longer be used to the detriment of the person concerned. This does not apply if the person concerned applies for admission to a trade or other economic enterprise, if the admission would otherwise lead to a considerable risk to the general public, or if the person concerned applies for the lifting of a business or other economic enterprise that prohibits the exercise of the trade Decision requested.
According to these stipulations, entries which must be deleted from the Central Trade and Industry Register under section 153 GewO need not be mentioned. On the other hand, criminal proceedings terminated under sections 153 and 153a of the German Code of Criminal Procedure (Strafprozessordnung – StPO) have to be indicated.
A termination under these provisions will not eliminate the assumption of innocence under criminal law; however, irrespective of this the circumstances of the case may give rise to indications for a lack of reputation, particularly in case of proceedings associated with punishable violations of relevant supervisory law, property- or insolvency-related criminal offences or tax offences.
Similar situations in other jurisdictions also have to be indicated. In case of doubt, the relevant division of BaFin should be contacted. These details have to be complete and accurate. In the case of any notifiable proceedings, copies of the rulings, decisions, sanctions, notices or other relevant documents have to be appended. BaFin reserves the right to obtain further information from the competent authorities, where necessary
For an assessment of possible conflicts of interest, on the form “Details of reputation, available time and additional mandates” the management board member must also declare any familial relationships with members of the management and the members of the administrative or supervisory body, both for the notifying undertaking and for its parent undertaking or subsidiary. If no details are provided on the form, this will be deemed a statement of “nil”.
On the form “Details of reputation, available time and additional mandates”, business relationships which could result in a certain degree of commercial dependence on the notifying undertaking have to be indicated as follows: Management board member, undertaking which is managed by the management board member, close relatives of the management board member = spouses, registered life partners, partners in a long-term relationship, children, parents, other relatives who belong to the household of the member. The relationships to the notifying undertaking, parent undertaking of the notifying undertaking and subsidiary of the notifying undertaking have to be disclosed. The nature of this relationship and the manner in which it is conducted have to be described. If no details are provided on the form, this will be deemed a statement of “nil”.
The Federal Financial Supervisory Authority of Germany (Bundesanstalt für Finanzdienstleistungsaufsicht – BaFin) provided a Guidance Notice on management board members pursuant to the German Banking Act (Kreditwesengesetz – KWG), the German Payment Services Supervision Act (Zahlungsdiensteaufsichtsgesetz – ZAG) and the German Capital Investment Code (Kapitalanlagegesetzbuch – KAGB). The following introduces the approach how to check compliance with the law in the context of a forensic rating of financial institutions.
The methodology applies to all credit institutions and financial services institutions supervised by Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht- BaFin) under the Banking Act (Gesetz über das Kreditwesen – KWG) and all payment and electronic money institutions supervised by BaFin under the Payment Services Supervision Act (Zahlungsdiensteaufsichtsgesetz – ZAG). It is also intended for undertakings supervised by BaFin under the Capital Investment Code (Kapitalanlagegesetzbuch – KAGB). The Banking Act, the Payment Services Supervision Act and the Capital Investment Code impose stringent requirements regarding the qualifications of a management board member. The major significance of these requirements is reflected in the fact that it is the claim of BaFin to issue a licence only when all conditions are met to conduct banking business and e-money business and to provide financial services and payment services. The licences under the Investment Code, too, are only issued if the management board members fulfil the professional and personal requirements stipulated in the respective law. BaFin may withdraw this licence if these requirements are no longer fulfilled.
The European provisions were enshrined in the Banking Act through the ” Act on the Implementation of the Directive 2013/36/EU on Access to the Activity of Credit Institutions and the Prudential Supervision of Credit Institutions and Investment Firms and on the Regulatory Alignment to the Regulation (EU) No 575/2013 on Prudential Requirements for Credit Institutions and Investment Firms” (Gesetz zur Umsetzung der Richtlinie 2013/36/EU über den Zugang zur Tätigkeit von Kreditinstituten und die Beaufsichtigung von Kreditinstituten und Wertpapierfirmen und zur Anpassung des Aufsichtsrechts an die Verordnung (EU) Nr. 575/2013 über Aufsichtsanforderungen an Kreditinstitute und Wertpapierfirmen – CRD IVUmsetzungsgesetz) of 28 August 2013, Federal Law Gazette I p. 3395, and the ” Act Amending Laws Relating to the Financial Market” (Gesetz zur Anpassung von Gesetzen auf dem Gebiet des Finanzmarktes – FinMarktAnpG) of 15 July 2014, Federal Law Gazette I p. 934. Moreover, the recommendations of the European Banking Authority “EBA Guidelines on Internal Governance” (GL 44) of 27 September 2011 and the “EBA Guidelines on the Assessment of the Suitability of Members of the Management Body and Key Function Holders” of 22 November 2012 have been transposed into German law. The second edition of this Guidance Notice outlines the professional and personal requirements for persons appointed as management board members under the relevant supervisory legislation. It provides an overview of the associated notification obligations, including the documents which must be submitted. It considers in detail the expanded requirements for management board members resulting from the changes to the Banking Act.
The credit institutions which are members of a cooperative auditing association (genossenschaftlicher Prüfungsverband) or which are audited by the auditing body of a savings bank and giro association (Sparkassen- und Giroverband) are to send the notification and any documents to be appended via their association, together with an extra copy intended for that association. The role of the associations must be observed in Germany.
Since 4 November 2014, the European Central Bank (ECB) has served as the supervisory authority for significant German credit institutions within the scope of the Single Supervisory Mechanism (SSM). The ECB supervises these significant institutions on the basis of national supervisory legislation, except where European law is directly applicable. Significant institutions submit notifications concerning the appointment and resignation of management board members – including all of the documents to be appended – to BaFin and the Deutsche Bundesbank.
The European Central Bank is responsible for assessing the professional suitability, the reputation and the available time of a management board member and will notify the institution of the result of its assessment directly. This assessment is made on the basis of the provisions of the Banking Act. However, the ECB is not bound by an existing national interpretation or administrative practice.
The European Central Bank, BaFin and the Deutsche Bundesbank shall be notified of other activities of a management board member of a significant institution and of any direct participating interests. The notifications and all documents and declarations to be appended must be submitted in German. The following deviating provisions apply to significant institutions directly by the ECB. Where documents are not issued in German, a certified translation or a translation prepared by a publicly appointed or sworn interpreter or translator will be required in addition to the original version. The relevant BaFin division may waive the translation of English-language documents. Significant institutions directly supervised by the ECB may submit the notification as well as all documents to be appended in either German or in English. The notifications prescribed by the Banking Act, the Payment Services Supervision Act and the Capital Investment Code shall be submitted without delay. As a rule, BaFin will no longer assume that a notification has been submitted without delay if a period of four weeks has been exceeded following the decision made by the relevant body. BaFin may require further documents and information if this appears necessary in an individual case. BaFin will not assume the costs associated with the required documents.
On their websites, BaFin and the Deutsche Bundesbank provide the following forms which are to be used for the individual notifications and for the declarations to be made.
An intention to make an appointment, its realisation, its withdrawal (Banking Act) or a change of this intention to appoint (Banking Act) a management board member shall be reported without delay. The institution or the KAGB undertaking must submit this notification. Management board members within the meaning of the Banking Act and the Payment Services Supervision Act are those natural persons who are appointed according to law, articles of association, articles of incorporation or a partnership agreement to manage the business of and represent an institution organized in the form of a legal person or a commercial partnership. Management board members within the meaning of the Capital Investment Code are those natural persons who are appointed according to law, articles of association, articles of incorporation or a partnership agreement to manage the business of and represent a capital management company as well as natural persons who actually manage the business of the capital management company without being formally appointed as management board members. This notification obligation also applies for the appointment of an acting management board member to fulfil the function of a management board member if the latter is unable to do so.
In its long-standing administrative practice, BaFin has refrained from forwarding appointment notifications submitted by the relevant association of auditors for credit cooperatives’ board members serving in an honorary capacity. However, notice must be provided of an intention to appoint a part-time management board member. Already the intention to appoint a management board member is subject to notification.
The following documents/declarations have to be appended to the notification:
By submitting the information and declarations from the management board member which have to be appended to the notification, the notifying institution or the notifying KAGB undertaking confirms that the information submitted is accurate to the best of its knowledge. If the management board member who is to be appointed has been, or is already a management board member or a member of the administrative or supervisory body of an undertaking supervised by BaFin, all of the documents/declarations to be presented in connection with this notification have to be re-submitted. BaFin may waive this requirement in individual cases.
A curriculum vitae has to be appended to the notification of intent. This curriculum vitae must be complete and truthful and must be personally signed and dated. The curriculum vitae shall focus primarily on the positions held during the management board member’s professional career. For these individual positions, the CV has to indicate not only the year, but also the month in which this position began or ended. In the description of positions held, in particular details of this person’s powers of representation, his or her internal decision-making powers and the divisions within the undertaking overseen by him or her shall be provided. Job references for employment positions within the last three years prior to submission of the notification have to be appended to the curriculum vitae, if available. Within the scope of the Capital Investment Code and the Payment Services Supervision Act, job references must only be submitted as required by BaFin. The curriculum vitae has to include the following details:
If a management board member has resided outside Germany within the last ten years, the period and country in question must be indicated. If the principal place of residence of the management board member and his or her place of work did not lie within the same country, this also has to be indicated. This information is relevant for BaFin insofar as this affects the register excerpts which must be submitted.
The social credit rating is comprehensively checked: Details of the management board member’s reputation, a “Certificate of good conduct for presentation to a German authority”, “European certificate of good conduct for presentation to a German authority” or “equivalent documents” from another country, excerpt from the Central Trade and Industry Register, details of additional mandates as a management board member or in administrative or supervisory bodies (Banking Act), details of available time (Banking Act). Comprehensive additional regulations must be observed for these points.
There are almost 200 countries in the world. Many countries do not have specific regulations on rating activities, but most industrialized countries do have laws on Credit Rating Agencies (CRAs). Credit Rating Agencies are required to get registered, licensed, recognized or certified.
Until the Credit Rating Agency Reform Act of 2006 was introduced in the United States, there was no really orderly procedure for recognizing Credit Rating Agencies. However, if ratings are used in law to regulate certain issues, provisions are also required as to which agencies may issue the relevant ratings.
Certain authorities are charged with administering the rules of their countries with respect to the practices of Credit Rating Agencies in determining credit ratings for the protection of users of credit ratings and in the public interest. They are promoting accuracy in credit ratings issued by Credit Rating Agencies. The authorities are working to ensure that credit ratings are not unduly influenced by conflicts of interest and that Credit Rating Agencies provide greater transparency and disclosure to investors.
In support of this mission, competent authorities conduct examinations of Credit Rating Agencies to assess and promote compliance with statutory and other requirements.
The competent authorities publish lists of the Credit Rating Agencies that they have recognized or certified. For various reasons, these are not always visible. Have a look at what happened on Monday, July 27, 2020 @ 09:00 – the relevant page of the website of the European Securities and Markets Authority (ESMA) was not accessible to everybody. No matter, which device and which browser you are using, you would not get their information online.
We therefore have lists of the data available to us here. In contrast to the official lists, our ones include links to Credit Rating Agencies’ websites. This makes it easy to get an overview of all recognized agencies and to contact Credit Rating Agencies. Please ask us for updates.
To find the Credit Rating Agencies recognized in the respective jurisdictions, follow the links in this table.
The table refers to the statutory rating requirements mandated by laws and regulations. In practice, however, ratings are often “encouraged”, “advised” and/or “requested by investors”. Please note that this is not an exhaustive list. RATING EVIDENCE has detailed information for a number of other countries. It should also be borne in mind that in some countries the regulation of credit rating agencies is not left to just one authority, but rather that a plurality of authorities within the same jurisdiction recognize credit rating agencies for different purposes according to different standards. Here are some examples:
Please see each country’s page for details.
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ACRA Analytical Credit Rating Agency
The Russian Government set a minimum credit rating for banks that service federal budget funds (the document is published on the official website of the Russian Federation Ministry of Finance at http://government.ru/docs/28240/).
The federal budget funds may be placed on deposits with bank that have a credit rating of at least A-(RU) under the ACRA’s (Analytical Credit Rating Agency; Russian: Аналитическое Кредитное Рейтинговое Агентство) national rating scale. A-(RU) reflects a moderately high creditworthiness, with some sensitivity to adverse changes in commercial, financial and economic conditions. Moreover, the Federal Treasury has the right to establish stricter credit rating requirements.
ACRA is a rating agency based in Moscow, Russia. It was established in 2015, due to their only relative independence colloquially known as the “Putin Credit Rating Agency”. Due to the withdrawal of US-based rating agencies because of legislative changes and sanctions against Russia, ACRA expects to become Russia’s main ratings issuer. ACRA apparently does not issue ratings to companies outside of Russia.
Expert RA was on the list of credit rating agencies accredited by the Bank of Russia. Being rated by Expert RA is among the official requirements imposed on banks, insurers, pension funds, and issuers. Expert RA ratings are used by Bank of Russia, Ministry of Finance, Ministry of Economic Development, Moscow Exchange and other financial market participants.
National Rating Agency Limited Liability Company (NRA)
National Rating Agency Limited Liability Company (NRA) was in the register of ratings agencies accredited with the Ministry of Finance of the Russian Federation. Ratings were officially recognized by the Central Bank of the Russian Federation, Vnesheconombank, Federal Financial Markets Service, Rusnano, Ministry of Agriculture of the Russian Federation, Agency for Housing Mortgage Lending, RTS and MICEX stock markets, National Association of Stock Market Participants, National Securities Association, National Managers’ League and Association of Russian Banks. On January 13, 2017 NRA informed the market participants that it will not take any rating actions with respect to credit ratings (including NRA’s Credit Rating, Financial Reliability and Financial Strength Ratings) assigned before the end of the transitional period (before January 13, 2017) until it is entered in the Register of Credit Rating Agencies. NRA continued assigning and updating non-credit ratings, such as the Reliability Rating, the Service Quality Rating, the Corporative Management Quality Rating, the Risk Management Quality Rating, the Employer Attractiveness Rating, and some other. The assignment and update of the said ratings will go on as a normal course of NRA’s business, without any changes. NRA examined the Bank of Russia’s statement of reasons for its decision not to include NRA in the Register of Credit Rating Agencies in order to prepare a new folder of documents and re-apply for registration.
In Ukraine, a person acquires the right to define ratings from the date of the issuance of the Certificate on Inclusion into The State Register of Authorized Rating Agencies.
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Here is a list of Credit Rating Agencies registered by the Banco Central de Uruguay:
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The European Commission’s decision to repeal the equivalence status for Singapore Credit Rating Agencies does not impact the operations of Credit Rating Agencies in Singapore. As confirmed by the European Commission, Credit Rating Agencies in Singapore will continue to be able to access the European Union market through the endorsement regime which they currently operate under. Under this regime, ratings issued by Credit Rating Agencies in Singapore are endorsed by their related entities in the European Union, and can continue to be recognised and used for regulatory purposes in the European Union.
There are two existing regimes for Credit Rating Agencies outside of European Union to have their ratings recognised and used for regulatory purposes in the EU, namely certification through the equivalence regime or endorsement. While Singapore’s regulatory regime for CRAs no longer has equivalence status, Singapore continues to be on the list of countries that the European Securities and Markets Authority (ESMA) has deemed as meeting the legal and supervisory framework for the endorsement regime.
Credit Rating Agencies play numerous roles in the financial system of Singapore. For example, direct insurer who apply for a licence need to report about credit raitngs. Since applicants need a licence to carry on life and/or general insurance business in Singapore, they have to meet admission criteria. The Monetary Authority of Singapore assesses applications for direct life and general insurance licences using a number of criteria, among them past and present credit ratings by international rating agencies, including Standard and Poor’s, A.M Best, Moody’s and Fitch.
Since June 30, 2017 the Monetary Authority of Singapore provides a Singapore-dollar Credit Rating Grant to encourage issuers in the Singapore-dollar bond market to issue rated bonds. The Singapore-dollar Credit Rating Grant covers the cost of issuer, programme and issue ratings from Fitch Group, Moody’s, and Standard & Poor (S&P). For each qualifying issuer, the SGD Credit Rating Grant can cover credit rating expenses from multiple issuances subject to the funding cap.
Although investors today generally have access to publicly available information such as company financial statements and offering documents when they consider their bond investments, the Monetary Authority of Singapore believes that greater availability of credit ratings in the domestic bond market will help to further improve market transparency, by providing timely and independent assessments of the credit worthiness of issuers throughout the life of a bond.
Credit ratings can also benefit bond issuers. Many regular issuers in the Singapore-dollar bond market are currently unrated and rely mainly on the same pool of domestic investors. Credit ratings will allow these issuers to attract a broader and more diverse investor base, including international institutional investors. The Singapore-dollar Credit Rating Grant is open to both foreign and domestic issuers.
The following rating agencies shall be Credit Rating Agencies approved by the Office of the Securities and Exchange Commission of Thailand to issue credit rating for instruments or businesses related to issuance and offer for sale under the Notification of the Capital Market Supervisory Board and instruments. They are required to provide credit ratings under the rules related to investment of mutual funds and private funds.
In the case where the credit rating for instruments or businesses related to issuance and offer for sale under the Notification of the Capital Market Supervisory Board, the domestic Credit Rating Agencies shall assign the credit rating within the a specified scope. Credit rating agency business is excluded from securities business in the category of securities investment advisory. In case credit rating agencies established under a foreign law issue a credit rating for instruments or businesses related to issuance and offer for sale of instruments in the Kingdom of Thailand, such credit rating agencies shall comply with the following requirements:
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Comisión Nacional Bancaria y de Valores (CNBV) main function is to inform the market about the real risks that the investing public faces in financial intermediation. Regulation is essential for greater transparency in its actions and less exposure to conflict of interest. The Comisión Nacional Bancaria y de Valores supervises 7 Credit Rating Agencies, called Instituciones Calificadoras de Valores (ICVs) in Mexico, within the framework of the Securities Market Law, the General Corporations Law Mercantile and Provisions on the matter.
In accordance with current regulations, among other information, these institutions must have available on their website the meaning and scope of their qualifications, the codes of conduct that govern their actions, the methodologies and procedures they use for the study, as well such as the analysis of the credit quality of the entities or issuers, and any substantial changes in them must be revealed so that they can be consulted by the investing public.
Comisión Nacional Bancaria y de Valores powers over Credit Rating Agencies:
Although each rating agency has its own rating scale, in general the rating levels granted by the Credit Rating Agencies could be grouped into: AAA, AA, A, BBB, B, CCC, CC, C, D. However, for greater In detail, the Comisión Nacional Bancaria y de Valores recommends to review the scales published on the internet pages of each Credit Rating Agency (see below).
The regulation of these types of entities requires that the information they disclose to the public be updated, relevant, timely, of quality and clear. The information provided by the Credit Rating Agencies allows the investor to have reliable reference information for investment decision making.
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Under the Working Committee on Financial Services Liberalisation, the Association of South-East Asian Nations (ASEAN) completed the Eighth Package of Financial Services Commitments (Eighth Package), which was signed by the Association of South-East Asian Nations Finance Ministers on April 5, 2019. To enhance access into the capital market via the Eighth Package, the Suruhanjaya Sekuriti Securities Commission Malaysia (SC) committed to allow 100% ASEAN-owned credit rating agencies in Malaysia. This offer came into force on October 7, 2019. Among them, are these two Credit Rating Agencies in Malaysia:
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The Superintendency of Companies, Securities and Insurance of Ecuador, Superintendencia de Compañías, Valores y Seguros (SC), listed on August 6, 2020 the following Credit Rating Agencies:
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The Superintendencia General de Valores (SUGEVAL) is the supervisor of Calificadoras de Riesgo, Credit Rating Agencies in Costa Rica. Here is a complete list of Credit Rating Agencies enrolled in Costa Rica as of August 6, 2020..
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Here are all recognized Credit Rating Agencies with name, address, district, city, state, postal addressing code, direct distance dialing, phone, fax, names of the risk rating director and internal controls director, registration date, Brazil national registry of legal entities number and current situation as of August 6, 2020.
In addition to the credit risk rating agencies registered with the Securities and Exchange Commission of Brazil, there are others, domiciled in third jurisdictions, which are recognized by the Securities and Exchange Commission for proving compliance with the requirements established by article 5 of CVM Instruction No. 521/2012. So far, agencies in this condition are as follows:
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The Australian Securities and Investments Commission (ASIC) published an information sheet (INFO 143) for credit rating agencies providing services in Australia. It gives guidance on the meaning of certain conditions that apply to these credit rating agencies under their Australian financial services (AFS) licence.
It covers the scope and purpose of Australian Securities and Investments Commission’s guidance, separating advisory services from credit rating services, applying methodologies in a continuous manner, timely disclosure of actual and potential conflicts of interest, periodic review of methodologies and models, and review of and disclosure about affected ratings after material changes. The conditions covered by Australian Securities and Investments Commission’s information sheet reflect certain provisions of the International Organization of Securities Commissions (IOSCO) Code of Conduct Fundamentals for Credit Rating Agencies (IOSCO Code), which credit rating agencies must adopt with specified modifications under their Australian financial services licence.
The guidance is provided in the context of the assessment by the European Securities and Markets Authority (ESMA) as mandated by the European Commission of whether Australia’s regulation and supervision of credit rating agencies is equivalent to the European Union’s Regulation on Credit Rating Agencies (EU Regulation).
Under the EU Regulation, regulation and supervision of credit rating agencies in Australia that is at least as stringent as that in the European Union is necessary for ratings prepared in Australia to be endorsed for use in the European Union. Regulation and supervision of credit rating agencies in Australia needs to be considered equivalent in order for ratings prepared in Australia by a credit rating agency without any legal presence in the European Union to use those ratings in the European Union
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The Credit Rating Agencies listed below have been registered in accordance with Section 5(1) of the Credit Rating Services Act, 24 of 2012 in South Africa. The list is published by the Financial Sector Conduct Authority in accordance with section 5(10) of the Credit Rating Services Act and is updated within five working days of adoption of a registration decision.
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The Canadian Securities Administrators identified Designated Rating Organizations, and imposed requirements on credit rating organizations wishing to have their credit ratings eligible for use in securities legislation. The rule of the Canadian securities regulators establishes a regulatory framework for the oversight of credit rating organizations by requiring them to apply to become a “Designated Rating Organization” and adhere to rules concerning conflicts of interest, governance, conduct, a compliance function and required filings.
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Credit Rating Agencies are those entities that are dedicated to making risk ratings. In Argentina, entities must be registered with the Comisión Nacional de Valores in order to carry out the activity and they can be private companies or public universities.
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Public Universities
Unidad CEPAF – Agente de Calificación de Riescos Universidad Pública (UBA)
Universidad Nacional de San Martin
Universidad Nacional de Tres de Febrero
Universidad Nacional del Centro de la Provincia de Buenos Aires
The following Credit Rating Agencies are registered by the Bangladesh Securities and Exchange Commission:
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An application for permission to form a credit rating company by persons meeting the eligibility criteria accorind to the Credit Rating Company Regulations shall be made to the Securities and Exchange Commission of Pakistan along with a number of documents. The Securities and Exchange Commission of Pakistan on being satisfied that the person seeking permission to form a Credit Rating Company has fulfilled the criteria in terms of the regulations may permit by an order in writing to establish a credit rating company.
The permission granted by the Securities and Exchange Commission of Pakistan to form a Credit Rating Company shall be valid for a period of six months unless extended for a maximum period of further three months under special circumstance, on the application of the promoters made before the expiry of initial six months.
The Securities and Exchange Commission of Pakistan may after making necessary inquiries and after obtaining such further information, as it may consider necessary, and if it is satisfied that each of its promoters or sponsors, directors, chief executive and chairman of the board of directors fulfill the terms and conditions mentioned in the Fit and Proper criteria given grant a licence, subject to compliance with the conditions of the grant of licence as specified in the regulation of Credit Rating Companies.
For renewal of its licence, the Credit Rating Company shall, one month prior to the date of expiry of its licence, apply to the Commission. The Securities and Exchange Commission of Pakistan if satisfied that the applicant continues to meet the requirements for licensing and is eligible for renewal of licence shall renew the licence for one year and issue a certificate of renewal of licence to the Credit Rating Company.
The detailed procedure for grant /renewal of licence and Annexures and Forms as mentioned above may be seen in Credit Rating Companies Regulations, 2016.
The following Credit Rating Agencies were registered according to the Credit Rating Companies Regulations, 2016:
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A credit rating agency whose application for grant of a certificate of permanent registration has been refused by the Securities and Exchange Board of India shall cease to undertake any credit rating activity.
Here is a list of registered Credit Rating Agencies in India as of August 3, 2020:
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The Securities & Exchange Organization of Iran publishes lists of certified financial institutions in the Islamic Republic of Iran. On July 28, 2020, these Credit Rating Agencies were on the list:
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The Swiss Financial Market Supervisory Authority FINMA supervises financial institutions making use of the services of Credit Rating Agencies, e.g. for the capital-adequacy calculations carried out by banks. Supervised institutions can use ratings to meet a number of regulatory requirements. In certain specific cases, only ratings from agencies recognised by FINMA may be used. The requirements for recognition are set out in FINMA Circular 2012/1 “Rating agencies”. They are designed to ensure that the quality of ratings used for regulatory reporting meets certain minimum standards. FINMA recognized the following Credit Rating Agencies. Please note that recognition can be limited to certain types of ratings.
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The purpose of supervising Credit Rating Agencies in Japan is, in view of specific problems in their governance, to ensure the appropriate business operations of Credit Rating Agencies in Japan, and to bring about the appropriate exercise of their functions.
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As in many other countries, the work of Credit Rating Agencies has been regulated in the Kingdom of Saudi Arabia, since ratings are referenced in various ways in the financial system. It is therefore necessary to determine which Credit Rating Agencies give the relevant ratings. On November 10, 2014, the Capital Market Authority of Saudi Arabia issued the Credit Rating Agencies Regulations, coming into effect September 1st 2015. The Capital Market Authority of Saudi Arabia announced on September 16, 2015 that it received applications from six companies to be authorized to carry out credit rating activities in the Kingdom of Saudi Arabia.
Six companies applied at that time to be licensed to conduct credit rating activities in the Kingdom under the new regulations:
The Credit Rating Agencies Regulations has been implemented to regulate and monitor the conduct of Credit Rating Agency activities in the Kingdom of Saudi Arabia, and to specify the procedures and conditions to be met prior to obtaining authorization to conduct such activities.
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The embarrassment for European credit rating agencies is certain even before the voting has started. “US Securitzation Awards 2022 – voting now live!” This is the call from GlobalCapital, inviting market participants to vote for the best rating agency when it comes to securitization. This is the choice:
S&P Global Ratings reported a revenue decrease of 15% to $868 million in the first quarter of 2022. Transaction revenue decreased 31% to $404 million. Transaction revenue was negatively impacted by a year-over-year decrease in debt issuance across all categories, but particularly within high-yield, which decreased approximately 68% year-over-year. Non-transaction revenue increased 7% to $464…
Four US rating agencies give Triple-A credit ratings to a bankrupt bank? On Friday 22 April 2022, the Amsterdam District Court, at the request of Amsterdam Trade Bank N.V. (ATB) and after hearing the Nederlandsche Bank N.V., declared ATB bankrupt. Declaring the bankruptcy means that a trustee has been appointed to wind up the Trade…
DBRS Morningstar will benefit from LCD data and news, supporting credit analysts and credit investor workflows. S&P Global Market Intelligence’s Leveraged Commentary & Data (LCD) combines real-time news, data, tools, and analysis on the U.S. and European leveraged loan, high-yield bond, distressed, and investment-grade corporate markets. Produced by S&P Global’s own team of experienced journalists…
Moody’s Investors Service is seeking feedback by May 05, 2022 from market participants on proposed changes to its Banks Methodology. The key proposed revision is to introduce new ratings that exclude government support (XG ratings) in Moody’s methodology for banks. The rating agency is currently collecting comments and opinions from market participants. Hence a remark…
The Office of Credit Ratings (OCR) assists the U.S. Securities and Exchange Commission (US SEC) in executing its responsibility for protecting investors, promoting capital formation, and maintaining fair, orderly, and efficient markets through the oversight of Credit Rating Agencies registered with the Commission as Nationally Recognized Statistical Rating Organizations (NRSROs). In support of this mission, the Office of Credit Ratings monitors the activities and conducts examinations of registered Nationally Recognized Statistical Rating Organizations to assess and promote compliance with statutory and Commission requirements.
The Office of Credit Ratings is charged with administering the rules of the US SEC with respect to the practices of Nationally Recognized Statistical Rating Organizations in determining credit ratings for the protection of users of credit ratings and in the public interest; promoting accuracy in credit ratings issued by Nationally Recognized Statistical Rating Organizations; and working to ensure that credit ratings are not unduly influenced by conflicts of interest and that Nationally Recognized Statistical Rating Organizations provide greater transparency and disclosure to investors.
Klick on the names of the following Credit Rating Agencies currently registered as Nationally Recognized Statistical Rating Organizations to visit their websites:
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Stock instruments issued or to be issued and / or traded on certain stock markets may be the subject of ratings. Stock ratings reflect the risks associated with the creditworthiness of the issuer and the stock market liquidity of an instrument. However, they do not address the risk of loss associated with price changes and other market conditions, nor do they consider the reasonableness of prices for their market value. Ratings assigned at national level cannot be compared across borders and are assigned using national rating scales.
Such equity ratings are usually the result of regulatory intervention by the state to prevent investors and issuers from being harmed by malpractice on the stock exchanges. The requirement to issue equity ratings is therefore to be understood in some states as a reaction to regulatory requirements. To the extent that such requirements do not currently exist or are not applicable, share ratings are based on market practice.
Financial instruments affected by equity ratings include, but are not limited to, common shares issued by financial and non-financial companies. The equity rating method does not apply to shares issued outside of a public offer by private funds or other investment instruments, or to preference shares, as these are accessible through their own methodologies.
Stock ratings are about the elements to be valued as part of the stock rating process. Stock ratings are supplemented by analytical considerations regarding the issuer’s credit rating. The equity rating methodology should therefore not be viewed in isolation, but should be read in the context of the global criteria reports of ratings for financial and non-financial companies.
Share ratings are also referred to as buy, sell or hold recommendations. A strong buy recommendation can be expressed, for example, by a double plus ++ and a simple buy recommendation by a simple plus +, vice versa in sales recommendations minus – and double minus –. If the rater gives neither a recommendation to buy nor to sell, the recommendation “hold” e.g. can be expressed by a circle symbol o.
Analyst opinions expressed as buy and sell recommendations are as fast-paced as the stock market itself, as the Corona crisis recently showed: If the price of a share falls, the sell recommendation can quickly turn into a buy recommendation.
Because buy and sell recommendations depend on daily market price fluctuations, equity rating repair does not refer to the question of whether a stock is over- or undervalued.
Rating repairs therefore relate to the awarding of share ratings, which give investors an independent opinion on the creditworthiness of the issuer and the liquidity risk associated with their shares. The purpose of such stock ratings is to provide an estimate of the liquidity risk an investor takes when purchasing a particular stock security in order to measure, in a timely manner, how easy or difficult it will be to sell those instruments if the investor so decides.
The analysis includes evaluating the stock’s historical stock market behavior in relation to presence and traded volumes, as well as the relationship between the movements of the stock and the financial situation of the company and the industry in which it operates.
Creditworthiness and market liquidity risk are the most important factors in the equity rating for which evidence can be produced. At national level, equity ratings are therefore based on two types of analysis: issuer creditworthiness and market liquidity risk. The combination of these two factors leads to the determination of a company’s equity rating.
The purpose of a stock rating is not to assess the risk of default on such stocks. Shares are equity securities and they represent ownership, not just a claim. Therefore, they cannot be in default. Because stocks do not have specific payment obligations, the stock rating is about the likelihood that the issuer will continue to operate. Conceptually, equity ratings indicate that the more creditworthy an issuer is, the greater the likelihood that its shares will continue to be traded throughout the business cycle. In the current case of the bankruptcy of Wirecard, a company listed in the German stock index DAX, it would have been the task of a stock rating to signal the probability of such an event by a low rating.
Stock ratings reflect risks related to the creditworthiness of the issuer and the market liquidity of the stock. For the reasons outlined, however, they do not deal with the risk of losses associated with changes in share prices and other market conditions, nor with the adequacy of the market price of a particular security. Equity ratings are therefore not suitable as trading signals, for example to buy and sell a stock within a few hours. Equity ratings are also not the basis for trading Contracts for Difference (CFDs). Under no circumstances does such analysis result in a recommendation to buy or sell a particular security. Share ratings are therefore not a special form of share price estimates, nor are share prices used to determine forecasts of liquidity risk.
The information required to carry out the risk analysis and assign ratings is obtained from various sources such as the issuer, industry data and other relevant sources. For the specific analysis of the liquidity of the share, the statistical data are obtained from market sources that are required to be able to calculate the relevant stock market indicators.
The analysis usually includes five years of company history and financial data. The information required to assess the creditworthiness of the issuer can be requested directly from the issuer or obtained indirectly through agencies. Once the necessary information has been collected and checked, an analysis can be carried out using a uniform method.
Forensic Rating
If criminal energy is involved – as allegedly in the case of the Wirecard company – the stock rating cannot easily detect the counterfeit. Rating agencies emphasize that the information received from the issuer or its representatives will not be reviewed or verified (again). While ratings look to the future, auditors’ attestations are there to confirm that the company’s report agrees with the facts it finds.
In order to counter fraud cases like WorldCom, Enron and now apparently also at Wirecard and to give warning signals to investors, a forensic rating is required. Forensic ratings typically deal with individual offenses, unlike criminology, which examines the basics of criminal behavior. The concept of “forensic science” – like the concept of “credit rating” – often does not meet the criteria for scientific research in the narrower sense. It is understandable that forensic ratings are predominantly carried out using methods that are well established, standardized and as undisputed as possible. Innovation and creativity must be severely restricted for reasons of comparability and fairness. The scientific principles of objectivity, reliability and validity also apply to criminal investigations. It is very important to ensure the highest possible quality standard as with every rating.
Auditing
Rating also does not replace the work of the auditor, because the auditor’s report is the overall opinion of an auditor after the audit of the annual financial statements. In it, the auditor assesses the conformity of the annual financial statements and the management report with the accounting regulations applicable to the company. An assessment is only made as to whether the situation of the company has been correctly represented, but no prognosis of the company’s creditworthiness and the liquidity of the share is given. A holistic assessment of the economic situation, which also requires a considerable degree of industry knowledge, is generally not carried out. The auditor’s report may only be issued after the material examination has been completed.
For securities without historical stock market information such as a first stock offer or with insufficient information, the analysis can practically only be based on the creditworthiness of the issuer. After approximately one year of trading and records of stock exchange transactions, equity liquidity is included in the analysis.
The issuer’s creditworthiness is expressed in its issuer default rating or its long-term national scale rating. Depending on the type of company, these are calculated according to the respective methods for non-financial – e.g. Chemical companies, technology companies) and financial companies (e.g. banks and insurance companies).
As with credit ratings, the purpose of credit analysis is to classify the likelihood that a company will meet its financial obligations (or in other words, the risk of default). The company’s operational and financial profile, its overall creditworthiness and thus the long-term rating of the issuer are good approximations of the risk of a company’s future cash generation capacity.
The equity rating includes qualitative and quantitative variables to measure the operational and financial risks of an issuer and to determine its credit profile in accordance with the concepts contained in the global rating methods for financial and non-financial companies.
As already indicated, an ex-post analysis is carried out to assess exchange liquidity, which is naturally dynamic and is based on the monitoring of certain relevant market indicators for measuring the liquidity of a share.
The world’s stock exchanges are very different. What is relevant for investors is the quality of the paper on the stock exchange where it can trade. Therefore, stock ratings are placed in the context of the country’s stock exchange. The analysis may include elements that reduce liquidity, e.g. for example, the series of a particular share that grants greater rights to another series of that security. The relative importance of the individual risk factors can vary. As a rule, indicators that indicate the low liquidity of a particular stock limit their rating to the lowest range on the scale.
The trading history of the share, the percentage of free float and the development of market capitalization and daily trading volume are factors that influence the assessment of the liquidity level of the share. The liquidity of a security is measured by the recent development of these and other stock market indicators, but essentially by the presence of the security on the market. Although the rating depends on the recent performance of the equity liquidity indicators, the track record of the indicators being assessed is critical to determining a rating.
Share ratings express the “option character” of a company’s shares. According to the option price theory, the shareholder can also be modeled as a buyer of a purchase option. By paying a premium – the share price – the buyer receives the right, but not the obligation, to continue operating the company. If the value of all the assets of a company falls below the value of the creditors’ claims against the company, the shareholder does not have to replenish equity, but can leave the company to the creditors for liquidation as part of an insolvency procedure.
Since the company’s credit rating also includes the risk of default, it characterizes the option character of the share. The lower the share rating, the greater the option character of the share.
Under strict Anti-Money Laundering (AML) regulations put in place by national governments, the European Union (EU), the Financial Action Task Force (FATF), and the United Nations (UN), all financial institutions and many types of companies are required to closely monitor their clients’ accounts and report any suspicious activity. These legal requirements often take the form of Know Your Customer (KYC) policies and KYC risk ratings, which are essential in preventing and reducing financial crime.
Excluded from the general test are “standard small customers” who do not wish to undertake particularly extensive or extraordinary business transactions and who have been classified by your rating system in advance in a correspondingly safe risk class. Nevertheless, the origin of funds and assets must generally be clarified. The details of the planned customer relationship such as scope and payment transactions must be rated and recorded.
KYC risk ratings are also important from the perspective of a variety of anti-terrorism and compliance laws and regulations. In particular, various national laws and regulations by international organizations prohibit doing business with certain persons and countries. For example, failure to comply with United States special regulations threatens financial penalties, from fines for executives to the removal of all business licenses in the United States. In addition, the reputational risk that can result from negative headlines in the absence of control is not to be underestimated.
In financial institutions characterized by limited resources and siloed solutions, the response to this has very often been to throw people at the effort. However, this has only added cost and complexity to the process and is not a long-term, sustainable solution. Therefore, there is a need in most organizations for a single, integrated technology platform that efficiently manages all KYC policies and regulatory compliance requirements from initial take-on right through the entire client lifecycle, including regular, ad-hoc and event-triggered reviews, as well as data and documentation refreshes.
With a requirement to ensure lifecycle compliance to KYC regulations both on a local and global level, financial institutions and many other companies are necessitated to perform regular client reviews based on assigned risk ratings. KYC touches on the process you put customers through to engage with your business. KYC is considered as the future of the client onboarding process since an efficient identity verification solution helps institutions meet regulations, generate new revenue streams, and reduce risks and costs.
Global regulations highlight KYC as fundamental to a strong AML compliance program. With an appropriate KYC risk rating tool you are gathering the data you need to effectively structure your AML program and take a risk-based approach, comply with regulations and prevent financial crime. Ratings serve as the backbone of global anti-money laundering efforts.
Conducting KYC checks is a process that takes place at onboarding, i.e. identifying your customer and verifying that identity. KYC risk ratings help since KYC is an ongoing process to help you comply with requirements and continuously feed back into risk management and business strategy. You need to ensure that you know who your customer is, what activity you should expect from him, and the overall risk he presents to your organizaiton. KYC risk ratings enable you to monitor that risk and mitigate it.
In the case of legal persons, the type of company, activity, industry, sector code, number of employees, ownership and corporate structure, as well as the most important (expected) financial ratios must be recorded.
In the case of natural persons, in particular the nature of the profession and the purpose of the business relationship must be recorded. In the case of Politically Exposed Persons (PEP), the function and the place of exercise must also be recorded.
Take the System for Award Management (SAM) for an example. Both current and potential government vendors are required to register in SAM in order to be awarded contracts by the Government. In the United States of America, vendors are required to complete a one-time registration to provide basic information relevant to procurement and financial transactions. Vendors must update or renew their registration annually to maintain an active status. SAM allows Government agencies and contractors to search for your company based on your ability, size, location, experience, ownership, and more. In this way, fulfillment of KYC requirements becomes a marketing tool.
The exact meaning of KYC and related acronyms can change across geographies, with some regulators preferring one set of terminology over another.
By setting transaction monitoring scenarios accordingly, a rating helps to react to the expected activity from that client, for example, the volume, value, and frequency of payments across an account. Throughout the relationship, when those thresholds are breached, rating upgrades or downgrades alert you about
All persons involved in the creation of the KYC and subsequent changes to the KYC master document must also be logged.
Realising that 100% certainty is not attainable forces compliance officers to take realistic, risk-based approaches to KYC consideration. The prevention of financial crime is a matter of probabilities. By acknowledging that risk can never be eliminated entirely, you can craft anti-money laundering policies by using rating technologies that are both as effective and as unburdensome as possible.
Even when using rating technologies you must still periodically check up on low-risk clients and accounts to ensure that nothing is unusual or out of place. You need to be aware that the risk of criminal financial activity cannot be entirely eliminated.
A “reasonable” assurance varies depending on various factors, including different national anti-money laundering legislations and the type of financial institution involved, and pertains to how much information should be collected about a customer. Rating whether or not particular customers are high risk and which processes or investigations must be completed if they are, allows a financial institution a reasonable assurance. They must then decide how much is an appropriate amount of information to gather. A good rating allows the financial institution to determine how much time they should spend monitoring the customer’s account, if any.
The different ways to go about KYC remediation are pivotal for preventing your company from getting involved in corruption, the terrorist financing, and money laundering. A rating-based KYC remediation tactic could be to screen, verify, and identify customers according to its KYC risk rating. There are many rating products that a company can use to accomplish this efficiently, and it may also be done manually. The remediation process is where they clear up any contradictory data, organize the information they have acquired, and determine what else is left for them to find out about the client.
If a client might be able to launder money or partake in other corrupt activities without any red flags being raised by your rating system your company could get in serious legal trouble down the line, possibly leading to fines and even jail time for employees. Because of their central role in the financial sector, financial institutions are most strictly regulated in regards to appropriate rating systems. They have the responsibility of reporting suspicious activity and helping the government to ensure that money laundering does not occur. Being fully aware of what is going on with your clients’ ratings is the first step towards being protected against backlash from illegal transactions.
As soon as the KYC remediation has been successfully completed, the company can then determine the risk that the client poses and continue to add to their portfolio. This step helps to decide whether the company or financial institution must report the client to authorities for suspicious activity or potential corruption.
A KYC risk rating is simply a calculation of risk: either that posed by a specific customer or that which an institution faces based on its entire client portfolio. It makes sense to calculate both of these risk ratings as each of them is equally important.
KYC risk ratings might take the following data into account:
Institutions gather as much data as they can about their customers, and they then compile this into a portfolio. Once the portfolio is completed, they closely analyse the information that they have obtained, and they determine the KYC risk rating of that specific client. If the risk rating is high, that client will be consistently and closely monitored. If the risk rating is low, the client will still be monitored, but not as diligently.
A KYC risk rating is also essential for another important reason: it allows institutions to make a evidence-based prediction of what they believe a client’s account should look like in the future. A KYC risk rating is useful for determining whether something is unusual, out of place or suspicious. If a client’s transactions begin to diverge significantly from the institution’s predictions, you will be notified and will be able to further analyze the transactions for suspicious behavior.
If you wish to keep your company free from involvement with corruption and money laundering, it is vital that your KYC risk rating system consistently calculates the KYC risk rating of all your customers. Assigning rating symbols is the surest way to determine which clients present a higher risk to your company, thus allowing you to avoid liability and ensure that these clients are monitored appropriately.
Relevant adverse information is simply any information that may cause officials to suspect an individual of being involved in a financial crime and can be acquired from any source. Although one source may appear to be more valid than another, all pieces of information may be looked at. Common sources include the Internet, the media, and other assorted databases. Specific individuals may even provide authorities with relevant adverse information such as proof of previous crimes, drug smuggling, fraud, scams, embezzlement, and theft, or evidence that a person is currently involved in tax evasion or even terrorist financing. Even if the information does not appear to be directly related to the scheme or suspect that is under evaluation, it can still certainly be relevant adverse information. Relevant adverse information does not need to necessarily be proven true, and it can include suspicions.
All relevant adverse information must be taken into consideration by financial institutions and governments when they are trying to track down financial crime and those who are responsible for it. While one piece of information may not seem as important as another, it can still wind up being the key for arresting money launderers and terrorist financers. Because of this fact, many financial institutions that are heavily regulated by KYC policies are required to constantly be on the look out for relevant adverse information in order to discover any hints or tip offs that may aid their investigations.
One of the most common types of relevant adverse information is the past criminal activity of an individual. If it is suspected that a person may be involved in financial crime, and authorities discover that that person has been previously caught for committing another crime, this gives authorities even more reason to suspect that individual to be involved. In contrast, if a person has no criminal history and is not known for associating with individuals who do, they are then at a much lower risk of being involved in something such as a money laundering scheme.
Another type of relevant adverse information that individuals oftentimes look at is if a person is on a sanction watch list. KYC risk ratings would go done since chances are that it is not for a good reason, and that authorities should be on the lookout for them being involved in any financial crime.
Meet the legal requirements and make informed decisions to prevent financial crime and corruption in your company:
There is a world-check risk intelligence database which provides accurate and reliable information for substantiated decision-making. Hundreds of specialist analysts around the world gather information from trusted sources such as watchlists, government sources and trusted media. Strict research guidelines are followed.
With our possible partners we are glad to help you find an out-of-the-box, rules-driven solution for all Know Your Customer policy requirements to support regulatory needs across multiple jurisdictions and business lines.
Simplify your business partner screening process with state-of-the-art technology combined with expert knowledge. The world check data is completely structured, aggregated and deduplicated. With flexible deployment methods, you can easily integrate data into a wide variety of in-house screening platforms, cloud-based, or other third-party solutions.
Let us help you with our relevant partners determine all of the client and counterparty data and documentation that is required to support the KYC and regulatory compliance obligations. Make use of dynamic decision tree intelligence to determine the regulatory journey of the client including all the regulations, KYC questionnaires, classifications and risk assessments that need to be adhered to and performed.
Under strict Anti-Money Laundering (AML) regulations put in place by national governments, the European Union (EU), the Financial Action Task Force (FATF), and the United Nations (UN), all financial institutions and many types of companies are required to closely monitor their clients’ accounts and report any suspicious activity. These legal requirements often take the form of Know Your Cutomer (KYC) policies and KYC risk ratings, which are essential in preventing and reducing financial crime.
Excluded from the general test are “standard small customers” who do not wish to undertake particularly extensive or extraordinary business transactions and who have been classified by your rating system in advance in a correspondingly safe risk class. Nevertheless, the origin of funds and assets must generally be clarified. The details of the planned customer relationship such as scope and payment transactions must be rated and recorded.
KYC risk ratings are also important from the perspective of a variety of anti-terrorism and compliance laws and regulations. In particular, various national laws and regulations by international organizations prohibit doing business with certain persons and countries. For example, failure to comply with United States special regulations threatens financial penalties, from fines for executives to the removal of all business licenses in the United States. In addition, the reputational risk that can result from negative headlines in the absence of control is not to be underestimated.
In financial institutions characterized by limited resources and siloed solutions, the response to this has very often been to throw people at the effort. However, this has only added cost and complexity to the process and is not a long-term, sustainable solution. Therefore, there is a need in most organizations for a single, integrated technology platform that efficiently manages all KYC policies and regulatory compliance requirements from initial take-on right through the entire client lifecycle, including regular, ad-hoc and event-triggered reviews, as well as data and documentation refreshes.
With a requirement to ensure lifecycle compliance to KYC regulations both on a local and global level, financial institutions and many other companies are necessitated to perform regular client reviews based on assigned risk ratings. KYC touches on the process you put customers through to engage with your business. KYC is considered as the future of the client onboarding process since an efficient identity verification solution helps institutions meet regulations, generate new revenue streams, and reduce risks and costs.
Global regulations highlight KYC as fundamental to a strong AML compliance program. With an appropriate KYC risk rating tool you are gathering the data you need to effectively structure your AML program and take a risk-based approach, comply with regulations and prevent financial crime. Ratings serve as the backbone of global anti-money laundering efforts.
Conducting KYC checks is a process that takes place at onboarding, i.e. identifying your customer and verifying that identity. KYC risk ratings help since KYC is an ongoing process to help you comply with requirements and continuously feed back into risk management and business strategy. You need to ensure that you know who your customer is, what activity you should expect from him, and the overall risk he presents to your organizaiton. KYC risk ratings enable you to monitor that risk and mitigate it.
In the case of legal persons, the type of company, activity, industry, sector code, number of employees, ownership and corporate structure, as well as the most important (expected) financial ratios must be recorded.
In the case of natural persons, in particular the nature of the profession and the purpose of the business relationship must be recorded. In the case of Politically Exposed Persons (PEP), the function and the place of exercise must also be recorded.
Take the System for Award Management (SAM) for an example. Both current and potential government vendors are required to register in SAM in order to be awarded contracts by the Government. In the United States of America, vendors are required to complete a one-time registration to provide basic information relevant to procurement and financial transactions. Vendors must update or renew their registration annually to maintain an active status. SAM allows Government agencies and contractors to search for your company based on your ability, size, location, experience, ownership, and more. In this way, fulfillment of KYC requirements becomes a marketing tool.
The exact meaning of KYC and related acronyms can change across geographies, with some regulators preferring one set of terminology over another.
By setting transaction monitoring scenarios accordingly, a rating helps to react to the expected activity from that client, for example, the volume, value, and frequency of payments across an account. Throughout the relationship, when those thresholds are breached, rating upgrades or downgrades alert you about
All persons involved in the creation of the KYC and subsequent changes to the KYC master document must also be logged.
Realising that 100% certainty is not attainable forces compliance officers to take realistic, risk-based approaches to KYC consideration. The prevention of financial crime is a matter of probabilities. By acknowledging that risk can never be eliminated entirely, you can craft anti-money laundering policies by using rating technologies that are both as effective and as unburdensome as possible.
Even when using rating technologies you must still periodically check up on low-risk clients and accounts to ensure that nothing is unusual or out of place. You need to be aware that the risk of criminal financial activity cannot be entirely eliminated.
A “reasonable” assurance varies depending on various factors, including different national anti-money laundering legislations and the type of financial institution involved, and pertains to how much information should be collected about a customer. Rating whether or not particular customers are high risk and which processes or investigations must be completed if they are, allows a financial institution a reasonable assurance. They must then decide how much is an appropriate amount of information to gather. A good rating allows the financial institution to determine how much time they should spend monitoring the customer’s account, if any.
The different ways to go about KYC remediation are pivotal for preventing your company from getting involved in corruption, the terrorist financing, and money laundering. A rating-based KYC remediation tactic could be to screen, verify, and identify customers according to its KYC risk rating. There are many rating products that a company can use to accomplish this efficiently, and it may also be done manually. The remediation process is where they clear up any contradictory data, organize the information they have acquired, and determine what else is left for them to find out about the client.
If a client might be able to launder money or partake in other corrupt activities without any red flags being raised by your rating system your company could get in serious legal trouble down the line, possibly leading to fines and even jail time for employees. Because of their central role in the financial sector, financial institutions are most strictly regulated in regards to appropriate rating systems. They have the responsibility of reporting suspicious activity and helping the government to ensure that money laundering does not occur. Being fully aware of what is going on with your clients’ ratings is the first step towards being protected against backlash from illegal transactions.
As soon as the KYC remediation has been successfully completed, the company can then determine the risk that the client poses and continue to add to their portfolio. This step helps to decide whether the company or financial institution must report the client to authorities for suspicious activity or potential corruption.
A KYC risk rating is simply a calculation of risk: either that posed by a specific customer or that which an institution faces based on its entire client portfolio. It makes sense to calculate both of these risk ratings as each of them is equally important.
KYC risk ratings might take the following data into account:
Institutions gather as much data as they can about their customers, and they then compile this into a portfolio. Once the portfolio is completed, they closely analyse the information that they have obtained, and they determine the KYC risk rating of that specific client. If the risk rating is high, that client will be consistently and closely monitored. If the risk rating is low, the client will still be monitored, but not as diligently.
A KYC risk rating is also essential for another important reason: it allows institutions to make a evidence-based prediction of what they believe a client’s account should look like in the future. A KYC risk rating is useful for determining whether something is unusual, out of place or suspicious. If a client’s transactions begin to diverge significantly from the institution’s predictions, you will be notified and will be able to further analyze the transactions for suspicious behavior.
If you wish to keep your company free from involvement with corruption and money laundering, it is vital that your KYC risk rating system consistently calculates the KYC risk rating of all your customers. Assigning rating symbols is the surest way to determine which clients present a higher risk to your company, thus allowing you to avoid liability and ensure that these clients are monitored appropriately.
Relevant adverse information is simply any information that may cause officials to suspect an individual of being involved in a financial crime and can be acquired from any source. Although one source may appear to be more valid than another, all pieces of information may be looked at. Common sources include the Internet, the media, and other assorted databases. Specific individuals may even provide authorities with relevant adverse information such as proof of previous crimes, drug smuggling, fraud, scams, embezzlement, and theft, or evidence that a person is currently involved in tax evasion or even terrorist financing. Even if the information does not appear to be directly related to the scheme or suspect that is under evaluation, it can still certainly be relevant adverse information. Relevant adverse information does not need to necessarily be proven true, and it can include suspicions.
All relevant adverse information must be taken into consideration by financial institutions and governments when they are trying to track down financial crime and those who are responsible for it. While one piece of information may not seem as important as another, it can still wind up being the key for arresting money launderers and terrorist financers. Because of this fact, many financial institutions that are heavily regulated by KYC policies are required to constantly be on the look out for relevant adverse information in order to discover any hints or tip offs that may aid their investigations.
One of the most common types of relevant adverse information is the past criminal activity of an individual. If it is suspected that a person may be involved in financial crime, and authorities discover that that person has been previously caught for committing another crime, this gives authorities even more reason to suspect that individual to be involved. In contrast, if a person has no criminal history and is not known for associating with individuals who do, they are then at a much lower risk of being involved in something such as a money laundering scheme.
Another type of relevant adverse information that individuals oftentimes look at is if a person is on a sanction watch list. KYC risk ratings would go done since chances are that it is not for a good reason, and that authorities should be on the lookout for them being involved in any financial crime.
Meet the legal requirements and make informed decisions to prevent financial crime and corruption in your company:
There is a world-check risk intelligence database which provides accurate and reliable information for substantiated decision-making. Hundreds of specialist analysts around the world gather information from trusted sources such as watchlists, government sources and trusted media. Strict research guidelines are followed.
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Let us help you with our relevant partners determine all of the client and counterparty data and documentation that is required to support the KYC and regulatory compliance obligations. Make use of dynamic decision tree intelligence to determine the regulatory journey of the client including all the regulations, KYC questionnaires, classifications and risk assessments that need to be adhered to and performed.
Oliver Everling, Jens Leker and Stefan Bielmeier (editors): Credit Analyst, De Gruyter Oldenburg, Walter de Gruyter GmbH, Berlin / Boston, http://www.degruyter.com/, updated and completely revised edition, 3rd edition 2015, 390 pages, ISBN 978-3-11-035379-2.
The escalation of the financial crisis has brought changes in hardly any other area as quickly as in the credit analysis. Basel’s banking regulatory requirements set new framework conditions for banks’ lending business after the financial crisis. At the same time, a variety of credit products have become increasingly important on the capital markets, from corporate bonds to securitisations. The credit and capital markets are growing ever closer together in the globalization process. Credit risks must be analyzed and managed – in banks as well as on the capital market, with both institutional and private investors. More professionalism protects market participants from the consequences of credit crises.
The postgraduate program CCrA® offers a comprehensive and practice-oriented qualification for banking and capital market credit experts.
The topics range from instruments for the analysis of individual risks to methods of active credit portfolio management. Important topics in the areas of banking regulation and credit research are also covered. In addition, the established rating agency Standard & Poor’s will give a hands-on insight into how they work in a workshop for Classic participants. Practical case studies and eSeminars complete the program. The compact program structure is designed for in-service participation and enables efficient qualification in just five months. Graduates hold the title CCrA® – Certified Credit Analyst.
Oliver Everling, Jens Leker und Stefan Bielmeier (Herausgeber): Credit Analyst, De Gruyter Oldenbourg, Walter de Gruyter GmbH, Berlin/Boston, http://www.degruyter.com/, aktualisierte und vollständig überarbeitete Ausgabe, 3. Auflage 2015, 390 Seiten, ISBN 978-3-11-035379-2.
Ann-Kristin Achleitner and Oliver Everling (Editor): Legal Issues in Ratings: Fundamentals and Implications of Ratings for Agencies, Investors and Companies Advised, Betriebswirtschaftlicher Verlag Th. Gabler, Wiesbaden 1st edition November 2005, http://www.gabler-verlag.de, hardcover, 470 pages, ISBN 3-409-14314-9.
The issuing of ratings by external rating agencies as well as internal ratings are of increasing relevance for the refinancing processes as well as for investment decisions on the part of investors. The book outlines the main legal implications of ratings for agencies, investors and rated companies.
Ann-Kristin Achleitner und Oliver Everling (Herausgeber): Rechtsfragen im Rating: Grundlagen und Implikationen von Ratings für Agenturen, Investoren und geratete Unternehmen, Betriebswirtschaftlicher Verlag Dr. Th. Gabler, Wiesbaden 1. Auflage November 2005, http://www.gabler-verlag.de, gebundene Ausgabe, 470 Seiten, ISBN 3-409-14314-9.
^^^ RATING EVIDENCE GmbH 