Back To Top

Firms to adopt their own credit rating systems next year

[THE INVESTOR] The Financial Services Commission on Wednesday came up with a set of measures to improve the credit rating market after criticism for belated actions on defaulting companies by local credit rating agencies.

The FSC will allow financial institutions to adopt stand-alone credit rating systems starting next year, and all businesses from 2018. Such independent rating systems will help firms evaluate their own risks while making investment decisions and improving fiscal soundness, the commission said. 

Companies will have to apply for designation of a credit rating agency with a third-party public institution from next year.

Currently, firms have been able to select two agencies at their need, which made it difficult for chosen agencies to make fair or adequate assessments of their client companies.

“The measure is to create an environment where companies can get assessed without suspicions about the relations between a firm and an agency,” said Kim Tae-hyun, director general of the capital market bureau at the FSC. “It will prevent credit rating agencies from being subordinate to subjects of appraisal.”

There are three credit rating agencies in Korea: NICE Investors Service, Korea Investors Service and Korea Ratings. The three players have formed a naturally oligopolistic market over the past 30 years.

The bankruptcy of Tong Yang Group in 2012 sparked criticism that the credit appraisers were too lenient on assessing credit risks of the group. Similar problems were caught with the recent collapse of Hanjin Shipping, too.

There have been calls from the market that a fourth player would help break the old practices and improve competition in the market, but the FSC judged it is too early to consider the issue.

By Song Su-hyun/The Korea Herald (