Moody’s Credibility Degradation of World’s Renowned IBs.
2012/07/11 Leave a comment
Moody’s is one of the world’s most credible and renowned credit-rating agencies. Their reports indeed, are not conclusive or definite but are quite trustworthy and also have spread effect in the world of finance. Before getting into the point, let us take a look at brief information about Moody’s and their elaborate rating system grids. Not a lot of people would have known, the Moody’s corporation we usually talk about has its genuine name which is Moody’s Investor’s Service (MIS). Moody’s Investor’s Service is the actual division that does the bond credit rating and so on. They also provide international financial research on bonds and credits issued both in commercial entities and governments. Moody’s is considered one of the world’s big three credit rating agency with Standard & Poor and the Fitch Group.
The Credit Rating Grid of Moody’s Investor’s Service
According to Moody’s, the purpose of the rating grid system is to provide investors with a simple system of gradation by which future relative creditworthiness of securities may be gauged. The numerical modifiers show the creditworthiness of each securities. Lower the number, the higher-end the rating. The Credibility Degradation On the day of 23, June, 2012the global financial world was drained in chaos. Moody’s Investor Service has announced 15 investment banks’ credibility to be dropped. The renowned banks such as Goldman Sachs, Citigroup, Deutsche Bank, Credit Suisse Bank, Royal Bank of Canada and Bank of America is also included among the list. Credit Suisse’s credibility has dropped 3 phases from Aa1 to A1 and Goldman Sachs and other 10 banks have dropped 2 phases, and lastly Bank of America showed radical depreciation of 4 phases. So what would be the core reason of these massive and firm-looking banks’ credibility degradation? Moody’s official stance of radical degradation seems to be quite reasonable but at the same time, hard to believe. Their official reason is that as the 15 banks mentioned, have been investing in a random way in the capital markets, which have lead them to excessive riskiness. In addition, due to the European financial crisis that rooted from Greece, their long-term profitability and growth are depreciated. But the biggest problem coming up-head is that Moody’s emphasized that the degradation process is not yet finished. This means that there can be more degradation done, depending on the sudden changes and situations the banks and financial markets will undergo.
Jack Ablin from Harris Private Bank has left a message for the investors around the world. In his massage, he strongly recommends to avoid investing in banks, until you will be able to see stability in economic sectors. But by evaluating the current situation, it will take quite a long time for both the banks and the financial markets (especially the EU crisis) to be recovered. Evaluation / Conclusion Ever since Merrill Lynch and few other worlds’ renowned banks went bankrupt, there had been numerous warnings on banks that they should be very precise and rationale on their investments. The IBs are following short term interests rather than looking for investment stability in a long-run. In case of Korea, as the revised proposal of the Capital Markets Act by FSC gets legislated, Korean commercial banks will be able to turn into an investment bank as they suffice certain level of capital ratio. FSC (Financial Services Commission), in cooperation with Financial Supervisory Service (FSS) is providing numerous capital regulations and policies to make prudential financial companies.