The ICMA Covered Bond Investor Council today (Wednesday) called on rating agencies to either adapt more quickly to changing regulations or rein in their actions and communications, citing concerns about rating volatility and an “observable fuzziness in ratings”.

“The CBIC is aware of rating volatility in covered bond ratings in particular as well as of other ratings in general, given the current environment characterised by low growth and unconventional monetary policy and a regulatory landscape in flux,” said the investor group in a letter to rating agencies today.

The letter is being sent to DBRS, Fitch, Moody’s and Standard & Poor’s, said Andreas Denger, senior portfolio manager at MEAG and acting chair of the ICMA (International Capital Market Association) CBIC.

“We recognise and appreciate the difficulties rating agencies face to be consistent in the race of changing regulations,” he told The Covered Bond Report. “But at the same time we question the current close link to senior unsecured ratings, which is dragging down covered bond ratings without there necessarily having been other changes, and whether support for covered bonds in terms of systemic relevance or aspects like exemption from bail-in is being sufficiently factored in.”

The appeal to the rating agencies also has the support of the ICMA Asset Management and Investors Council (AMIC), of which the CBIC is a permanent working group, with Robert Parker of Credit Suisse and chairman of AMIC signing the letter in addition to Denger.

In its statement the CBIC encouraged rating agencies to “either act faster with regard to changes in their respective rating methodology in the light of the changing regulatory landscape, or to be more cautious in terms of communication and actual rating changes in the light of changing regulation for banks as issuers of covered bonds”.

The CIBC acknowledged the challenges rating agencies face in trying to give a credit opinion “through the cycle” and adapt methodologies to changing capital market rules while also aiming to ensure consistency and comparability of rating opinions over time.

“It is obvious that these are conflicting targets, so it would be naive in our view to call for a flawless approach,” it said, also noting that it considers rating agencies to be contributors to transparency and that it does not want to state a preference for a certain rating approach.

However, the CBIC lamented certain developments and features of the rating landscape, for example that a given issuer can be rated higher by one rating agency than that same issuer’s covered bonds by another rating agency.

This situation “simply cannot in our view be explained by different methodologies”, it said.

“Given the fact that for some covered bond market segments ratings are at the very edge of the investment grade universe, this observable fuzziness in ratings becomes relevant to the market due to individual investment guidelines as well as regulatory constraints,” said the CBIC.

Covered bond ratings should take into account features such as systemic relevance, regulatory treatment and central bank support, it said, with support being one of the key rating drivers and one that will necessarily involve a qualitative element of evaluation.

“However, in the light of recent rating actions, we tend to wonder whether the question of support is always treated symmetrically,” said the investor council, “i.e. a regulatory induced trend towards lower support for banks in general compared to generally friendly regulatory treatment of covered bonds.”

It set out a four point wishlist for how rating agencies should mould their methodologies, calling on them to:

1. permanently review methodologies and ratings more frequently in light of pending regulation;
2. exercise caution when it comes to taking action on covered bond ratings (automatically downgrading them) after a bank senior unsecured downgrade;
3. take into account factors such as systemic importance and the “dimension” of the relevant national covered bond market when assessing the starting point for covered bond ratings; and
4. consider that the starting point for a covered bond rating might be subject to various parameters such as those mentioned above, but also that the differential between a covered bond and issuer rating might also depend on factors such as central bank behaviour, the country of domicile or the systemic relevance of covered bonds for a given national mortgage market.

“Furthermore, the absolute rating level of the state of domicile seems to limit implicitly or explicitly the maximum deviation between covered bond ratings and issuer ratings which might lead again to rating cliffs and automatic rating actions,” added the investor body.

The CBIC letter can be found on the ICMA website.