raining in the city

Insolvent Greensill Bank Relied on “Scope Risk Solutions”

Agencies, Auditors, Authorities, Regulations

The German supervision missed the chance to intervene.

“It cannot be right for a rating agency to give a bank a rating and at the same time advise on the analysis,” the Frankfurter Allgemeine Zeitung quotes Frank Schäffler (FDP), a member of the German Bundestag. “That stinks to heaven,” is how the financial expert sums up the findings that the Federal Government of Germany had to disclose about a local credit rating agency in Berlin. The Berlin credit rating agency currently operates under the name “Scope Ratings GmbH”, maintains a website on the Internet and presents itself as “the leading European provider of independent credit ratings” with a market share of less than 1%.

The Federal Government’s responsibility for undesirable developments at Greensill Bank in Bremen apparently extends further than previously known. This can be seen from the response of the Federal Government to the “Kleine Anfrage” from MP Frank Schäffler et al. and the parliamentary group of the FDP in the Bundestag. The answer reveals new facts about the Greensill Bank insolvency.

As important as the answers given by the Federal Government are, the Federal Government fails to answer important questions. This emerges from the Bundestag printed paper (BT-Drucksache 19/30208) dated June 1, 2021: “Reactions of the federal government to the rating of Greensill Bank AG”.

Greensill Bank not only had a chairman of the supervisory board, who was also an investor and advisory board member of the Berlin rating agency that gave the rating, but also relied on “Scope Risk Solutions” to conduct credit analysis.

“The annual auditor of Greensill Bank reported in the 2019 audit report on the outsourcing of ‘preparation and ongoing monitoring of credit analysis’ to Scope Risk Solutions GmbH, a sister company of Scope Ratings GmbH and at the same time a subsidiary of Scope SE & Co. KGaA (Scope Group)”, writes the Federal Government.

It is therefore clear that the conflicts of interest maximized at Greensill Bank: Scope Risk Solutions GmbH “analyzed” the credit risks for Greensill Bank, but at the same time the result of this work was “assessed” by Scope Ratings GmbH itself. Scope provided risk management and then assessed how good it was – and that was also “controlled” by the same supervisory board or advisory board.

The audit reports of Greensill Bank are not publicly available, so that creditors had to rely on the intervention of the Federal Government or the Federal Financial Supervisory Authority (BaFin), which had access to the audit reports.

An important warning signal was overlooked: In 2019 there was not only the “A-” (single A minus) credit rating from Scope Ratings GmbH, which was published, but also a rating from another recognized credit rating agency, the GBB-Rating in Cologne, which belongs to the Auditing Association of German Banks. This credit rating was not published. There is no doubt that the former managing director of the auditing association, Eberhard Kieser, still knew “his” rating agency when he was responsible for the Greensill Bank‘s supervisory board where he was sitting alongside the investor of the Scope rating agency, Maurice Thompson. Since this rating was not published, it can be assumed that it was not advantageous for Greensill Bank to publish GBB-Rating’s credit rating as well.

“According to Section 10 (4) of the Ordinance on the Financing of the Compensation Scheme of German Banks GmbH and the Compensation Scheme of the Federal Association of Public Banks Germany GmbH, CRR credit institutions must transmit all current ratings related to them in order to calculate the contributions to the compensation scheme. Correspondingly, the ratings of Scope Ratings GmbH and GBB-Rating were used for the Greensill Bank‘s 2020 contribution calculation ”, says the Federal Government in it’s response. The result of this calculation would allow conclusions to be drawn about the rating issued by GBB-Rating, which BaFin must have been aware of. Instead of disclosing the contribution made by Greensill Bank to the compensation scheme, the federal government has placed this information under confidentiality.

The Federal Government claims not to have an overview of the fact that there were hardly any private banks in Germany in 2019 that were rated better than Greensill Bank: “A comparative evaluation of publicly available ratings for all private German banks is not carried out on a monthly basis.” However, the information content of the rating results precisely from the relative classification on the ordinal scale – thus the answer of the Federal Government, in which it relies on the information provided by BaFin, shows that it obviously did not understand key functions of credit ratings in banking supervision.

For example, the data from the Central Repository (CEREP) of the European Securities and Markets Authority (ESMA) are not used by the German supervisory authority. The CEREP is supposed to keep all rating data ready: “The Federal Government has no knowledge of this. The central register with statistical data on rating agencies (CEREP) lies in the exclusive area of ​​responsibility of ESMA and therefore outside the supervisory area of ​​BaFin.” The Federal Government is therefore not even able to give an answer as to who exactly and under what aspects the data supplied by Scope Ratings to CEREP are checked.

The Federal Government is also “blank” when it comes to the question of what role Scope’s ratings played for municipalities for their investments in Greensill Bank or whether municipalities or other public institutions had an alternative opinion or private ratings. “The federal government has no knowledge of this.” As a result, the federal government was not aware of the far-reaching consequences of the conditions it permitted at Greensill Bank.

The Federal Government did not take any measures to protect against conflicts of interest at Scope: “The parallel activity of Scope Ratings GmbH and Scope Risk Solutions GmbH for the bank and the Greensill Group became known to BaFin since receipt of the final report on the report carried out at Greensill Bank Deposit protection audit of the Auditing Association of German Banks (PdB) announced on June 15, 2020. “

In addition, BaFin had not investigated the personal links: “In March 2021, BaFin learned from press articles that the chairman of the Greensill Bank‘s supervisory board was acting as an advisor for the Scope Group.” The fact that the long-standing board of directors of the Auditing Association of German Banks also sat on the Greensill Bank’s supervisory board is not even mentioned.

“In retrospect, the existence of conflicts of interest between the Scope Group and the Greensill Bank, which may arise from the aforementioned issues, cannot be ruled out,” concludes the Federal Government, whose government members had many contacts with the numerous advisory and supervisory board members of Scope.

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