February 15, 2021
The Board of the International Organization of Securities Commissions (IOSCO) today published a report analyzing the observed impact of COVID-19-related government support measures (GSM) on the credit ratings of the three largest credit rating agencies- Fitch, Moody´s and Standard & Poor´s (collectively the “CRAs”).
In response to the COVID-19 pandemic, governments worldwide rapidly deployed fiscal, monetary, and financial support measures on an exceptional scale Simultaneously, the pandemic-induced economic and market turmoil led to many credit ratings downgrades, bringing CRAs and their ratings under greater regulatory, industry and media focus.
The review was conducted by IOSCO´s Financial Stability Engagement Group (FSEG) and is based on publicly available information gathered from the CRAs, as well on IOSCO member expertise and analysis. To supplement the analysis, IOSCO also hosted roundtable discussions with industry participants and held bilateral discussions with each of the CRAs.
IOSCO’s report provides a summary of the observed impact of GSMs on credit ratings and credit ratings methodologies through a review of any changes made to the methodologies, their application to rating actions taken during the timeframe of the pandemic, as well as implications of the withdrawal of GSMs on credit ratings and methodologies. The report does so across four main asset categories:
– Financial Institutions
– Non-Financial Corporates
– Structured Finance
In terms of outcomes, IOSCO observed no material changes to CRA methodologies and that rating disclosures typically explain the impact of the GSMs where such impact was material to the rating decision.
In addition, the review notes that CRAs considered the impact of the pandemic and the economic shock in their credit ratings. The review also suggests that GSMs played a significant role in alleviating the downward pressure on credit ratings. However, according to CRAs, the long-term effectiveness of GSMs cannot be fully assessed and measured at this stage.
Furthermore, the forward-looking assumption made by CRAs is that the GSMs will continue until the economic environment is stable enough to allow for gradual withdrawal. The risk of premature withdrawal of GSMs, especially in emerging market economies, is one of the downside risks to the global economic recovery post-pandemic.
The report concludes that, as the after-effects of the COVID-19 health crisis continues to unfold into 2021, it remains important to continue to consider the effects of the GSMs across credit ratings and credit rating methodologies.