Comparison system for rating scales: proposals from the regulator

The Bank of Russia believes it possible to conduct comparison of rating scales for the purpose of quality control over the ratings actions performed by credit rating agencies (CRAs). This and other approaches employed by the regulator to establish a comparison system for rating scales (mapping) are described in the final report prepared on the basis of joint consultations between the Bank of Russia and representatives of the professional community.

It is assumed that the regulator will use this mapping methodology to compile a conformity table of credit ratings assigned by various credit rating agencies. As the use of mapping is bound to concern the majority of financial market participants, the Bank of Russia has monitored their opinions on the feasibility of this system, obtained approval of all the participants in the consultations, and gathered their proposals and amendments to the newly-created methodology.

The mapping of CRA rating scales is aimed at systematising data on credit risk assessment concerning organisations with credit ratings assigned by two and more credit rating agencies, and their financial instruments.  The process of mapping does not connote equivalence between credit ratings of different agencies, it only implies their comparability for a number of criteria.

This system may be sought-after by investors and financial consumers, and it may also prove useful in the regulation of activities of financial market participants.

When elaborating the methodology, its authors supported the proposal not to categorise bank resolution as a default. As the use of mapping becomes more established, the Bank of Russia will differentiate between cases of financial resolution without negative consequences for bank creditors and those with negative consequences, which, if need be, will be included in the default statistics. The issue concerning the publicity of the rating scale mapping system was a priority topic on the agenda of the consultations. Moreover, market participants identified additional risks which may arise during the application of the rating scale mapping methodology.

Conformity tables based on the proposed methodology will be compiled after national credit rating agencies accumulate sufficient default statistics across a wide range of rated entities, including non-financial organisations.