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European Association of Credit Rating Agencies (EACRA")"

We note that the proposed mapping is solely based on a qualitative assessment and does not take into account historical default rates in the analysis.
This SF mapping clearly highlights the limits of an approach based on historical default evidence: while ratings are forward looking opinions on credit risk, the mapping of ratings is usually based on observed historical default rates. But, a revised mapping (eg downwards) impacts going forward.
While S&P, Moody’s and FitchRatings showed a very high default rate during the global financial crisis, ratings are slowly returning to pre-crisis level. Seen through the lenses of the SA mapping methodology, the AAA SF ratings of S&P and Moody’s would map into CQS 4 (corresponding usually to the “BB” category). As this revised mapping would be applied to post-crisis, new assets, investors would need to set far higher capital requirements! Given the systemic effect of such a revision, the mapping was done on a qualitative basis only. EBA mentions that these CRAs have changed their rating methodologies and that historic performance is not representative for the current methodologies. Given the track record during the global financial crisis, we think that a change in methodologies was an absolute necessity! Additionally, will the argument regarding the change of rating methodologies be applied equally to any CRA in any market segment?
This SF mapping also demonstrates the difficulty of defining a “single view” across highly different asset classes and geographies. According to the consultation paper, the default rates observed are significantly driven by the performance of two specific asset classes during the crisis years, namely the US-subprime RMBS and US CDOs. Given the high number of ratings in these two market segments, overall performance is “biased” downwards.
This SF mapping is a clear evidence that the benchmarking of ECAI ratings to the ratings of S&P, Moody’s and Fitch does not derive any meaningfull information. Applying this “self-referencing system” to these 3 agencies to SF ratings would mean that AAA ratings would map on a quantitative basis into CQS 1. This shows that all three agencies have had the same performance and that none was able to detect the global financial crisis. Basing the mapping of other ECAIs on a comparison to S&P, Moody’s and Fitch is therefore not advisable.
Last but not least, we note that the revision of a mapping does not impact on the Credit Rating Agencies but impacts on the user of these ratings (and thereby to issuers) – instead of revising a mapping, in case a deterioration of ratings quality is being observed, we think that ESMA should investigate and take, if required, supervisory actions to restore rating quality or withdrawn the registration of a CRA in ultima ratio.
Similar to the SF mapping of the dominant 3 ECAIs, the approach to the mapping of the other ECAIs is based on a qualitative process. As historical rating data are not taken into account, the lack of a high number of ratings does not constrain these ECAIs mappings. The SF mapping is purely based the existence of a specific rating methodology and the meaning of the rating scales. We welcome this approach as it centers on the rating methodologies as a basis for assigning credit ratings.
We think that same level of supervisory judgment should be applied to the SA mapping:
- The vast majority of CRAs have not the track record to undergone the mapping process based on historical default evidence (requiring amongst others 12 years of rating information)
- Would allow consistency in approach in all market segments (both in terms of types of exposures and types of users of ratings)
- Reduces complexity
- Correspond to the requirements of the Article 136 specifically calling for a framework for new, small CRAs
- Creates a level playing field for all ECAIs and thereby contributes to more competition in the rating market
In the attached file, we provide a comparative table of the mapping approaches taken.

The above comparison shows that two different standards/approaches are being used in the SF and SA mappings.
While consistency between CRR SA mapping and Solvency II mapping was explicitly a target, this is not the case for the SF mapping. To our understanding, the Solvency II mapping also covers securitizations. Therefore 2 different mappings for SF ratings of non-systemic ECAIs under CRR and Solvency II exist: while a AAA rating would map into CQS 1 under CRR, the same transaction would map into CQS 2 under Solvency II. Insurances will be disadvantaged compared to CRR and would most potentially not buy the asset. Insurances would not nominate small CRAs as ECAIs for the calculation of risk factors.
While CRAs may qualify an asset as Structured Finance, banks need to assign exposures according to the definitions of the CRR. Having two different mappings for non-systemic ECAIs additionally increases complexity.
From a more general perspective, the different treatment of non-systemic ECAIs under the SA and SF mapping creates a two-tier system of ECAIs: those having received the “traditional” mapping across all asset classes and users of ratings and the other ECAIs. This will substantially impact on the non-systemic ECAIs and creates a long-term supervisory barrier to more competition in the CRA market.
Thomas Missong
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