In light of the intense criticism leveled against credit rating agencies for their perceived failure to analyze adequately sovereign creditworthiness, the Bertelsmann Foundation has developed a blueprint for an international non-profit credit rating agency (INCRA), whose rating criteria are designed to increase credibility and international acceptance.
"Faulty sovereign credit ratings contributed to the most recent financial crisis that threatened a global cataclysm," said Bertelsmann Foundation chairman and CEO Gunter Thielen. "We need an additional, independent institution for sovereign-risk assessment, and we need to raise the quality of sovereign ratings." The INCRA proposal is the foundation's contribution to providing a credible, practical and internationally inclusive method for increasing confidence in the financial sector and to preventing another crisis.
INCRA’s governance structure and operating procedures provide needed transparency and legitimacy. A supranational “Stakeholder Council” ensures independence by serving as a buffer between funders and the operational business. A “Credit Policy Committee” functions as a quality-control body, ensuring that ratings are grounded in a competent and comprehensive methodology.
INCRA’s financial framework is based on an endowment that provides for sustainability and security. Funding comes from a broad coalition of entities including governments, corporations, NGOs, foundations and private donors. An endowment of US$400 million is the estimated amount needed to establish and maintain INCRA, safeguard its independence, and generate sufficient annual revenue for maintaining operations.
The organization’s non-profit status helps ensure accountability and quality of ratings, which consequently minimize potential conflicts of interest. Through a network of offices in the US, Europe, Asia and Latin America, and the inclusion in INCRA's Stakeholder Council of a wider set of societal actors such as governments and civil society organizations, INCRA can gain worldwide recognition and legitimacy.
INCRA also enhances the quality of sovereign ratings by conducting risk assessments with macroeconomic and forward-looking indicators that take into account long-term socio-economic and political prospects, and potential political and social constraints on countries’ repayment abilities. These indicators comprise data developed, tested and included in the Bertelsmann Foundation’s Transformation Index and Sustainable Governance Indicators. INCRA is unique in incorporating such forward-looking indicators into its ratings methodology.
The Bertelsmann Foundation names the G20, which has already addressed the need for reform of credit rating agencies, as one of the best forums for garnering the political will to establish INCRA. The foundation also calls for corporate players, NGOs and the non-profit sector to commit themselves to playing a more meaningful role, through INCRA, in the global financial sector.
The complete INCRA blueprint and an executive summary can be found at: www.bfna.org.