Crisil - Ride the Investment Waves

A detailed article on how a new startup is trying to enter the rating industry in the US. All the tactics, strategies that can create an opening.

2008 was the perfect storm to disrupt the status quo in the ratings industry but this is what happened, “That’s where I scratch my head,” says Powell. “You can’t dispute that the ratings agencies were complicit in the financial crisis, yet investors are still requiring them to rate deals.”

And this captures the entry the barriers very well, “Even though the scandals made an opening for new competitors, breaking into the business has still been a long slog.”

The article also provides the failings of an investor paid model and regulator assigned rating agency. Investor have their own biases which they would want to be reflected in the ratings, same as companies do now. Also, there is the case that ratings should be publicly available and no investor wants others to free ride on their investment.

In a regulator assigned or rotating agency model, the article says that any incentive for thorough research is eliminated as the rating business is assured. I somewhat agree with them, the problem this model creates is of differentiation. A rotating model would ensure perfect division in market share, this would mean that the only way to increase earning is with reducing costs, and all agencies will reduce research costs to maintain the same amount of quality level.

What is to be noticed is that even after being given the perfect point of entry after the GFC, disruption in this industry is a very slow process. If at all, it is the regulatory disruption that could swiftly change the landscape of this industry.

https://www.institutionalinvestor.com/article/b1b74shdrlpzjy/How-to-Break-Up-a-Credit-Ratings-Oligopoly

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