"Regulators started telling their financial institutions, starting with the banks, you must pay attention to only these handful of entities," Larry White, a professor at New York University's Stern School of Business who's testified before Congress about credit ratings, said in a telephone interview. "That gives the NRSROs a lock."
After the Dodd-Frank financial-regulation overhaul instructed regulators to strip ratings from rules, bank supervisors are struggling to find a substitute measure of risk. Making the change is difficult because the international bank capital standards known as Basel III still use ratings, David Wilson, chief national bank examiner at the OCC, told Congress at a hearing in July.
Much of the credit raters' power comes from mutual funds, pension managers and other investors using their grades as cutoffs or triggers in contracts, Mizuho's Cox said. "The first thing we ask is what are they rated and the discussion goes from there," he said.
Moody's, S&P and Fitch face limited competition in structured finance. Kroll started a rating company that began evaluating commercial-mortgage backed securities this year and plans to expand into municipal bonds and residential mortgages.
Morningstar, the Chicago-based mutual-fund data company that bought a credit-rating business last year, has rated 12 of the 32 commercial-mortgage-backed securities issued this year.
At least nine of those 12 were also rated by Moody's, S&P or Fitch, Bloomberg data show. Morningstar plans to expand into bonds backed by residential mortgages, Robert Dobilas, president of the ratings business, said in a telephone interview.
Regulators are considering other measures which may encourage competitors to Moody's, S&P and Fitch. In Europe, regulations were proposed today that would require companies to periodically rotate the firm they use to rate their credit.
"Credit rating agencies should follow stricter rules, be more transparent about their ratings and be held accountable for their mistakes," Michel Barnier, the European Union's financial services chief, said in a statement. "I also want to see increased competition in this sector."
Douglas Peterson, who took over as S&P's president in September, met with Frank on Nov. 3 to express concern over a draft of the European proposals, according to Frank. He also visited the SEC to discuss a plan by Senator Al Franken, Democrat of Minnesota, to create a board to give out rating assignments in structured finance.
"The agencies are as powerful as ever and will remain so," Glenn Reynolds, the chief executive officer of New York- based independent debt research firm CreditSights Inc. who has testified to Congress on ratings reform, said in a telephone interview. "It's economic efficiency to pay the man and go through the turnstile."