SEC Provides Initial Observations From Its COVID-19 Market Monitoring Group

The SEC’s COVID-19 Market Monitoring Group has issued its initial observations on credit ratings, procyclicality, and related financial stability issues. These observations included the following:

• “Analysis of potential effects of ratings actions should focus on current circumstances. Given the idiosyncratic nature of the health and economic effects and consequences of COVID-19, we believe that analogies to the role of rating agencies in the 2008 global financial crisis should be approached with caution. We note that, in addition to substantially differing economic conditions and stresses, the relevant analytical assumptions and methodologies used by rating agencies in that period also were substantially different.”
• “Cost of debt capital is driven by a wide range of financial and non-financial factors and forces; ratings downgrades are generally lagging indicators of cost of debt capital.”
• “Observable bunching just above and below the investment grade level may be attributable to various macroeconomic trends, including policy, regulatory and investor choices.”
• “When considering the effects of credit ratings on market structure, including potential procyclicality of ratings downgrades, it is important to take into account the wide and diverse spectrum of our credit markets and all major credit market participant types.”
• “The procyclical effects of credit ratings used in bilateral specialty finance also are appropriate areas for continued monitoring.”