Credit Rating Market Dominated by Three Companies... "Strengthen Market Discipline Rather Than Easing Entry"

[Asia Economy Reporter Ji Yeon-jin] The domestic credit rating market, valued at 140 billion KRW, is evenly divided among three rating agencies, indicating a high market concentration. Although competition among credit rating agencies has recently intensified and the quality of credit ratings has improved, the market structure favors issuers who request credit ratings, and market reputation does not seem to play a significant role. In response, financial authorities have decided to review mid- to long-term improvements to the licensing system.

On the 12th, the Financial Services Commission announced that, as part of the current administration's national agenda to create a free entry environment in the financial sector and to build financial infrastructure suited to the Fourth Industrial Revolution era, it has finalized the "Competition Assessment and Entry Regulation Improvement Plan for Credit Rating Business" discussed by the Financial Industry Competition Evaluation Committee.

The credit rating business operates under the Financial Services Commission's license and evaluates the repayment ability of issuers of financial investment products such as bonds upon their request, assigning ratings accordingly.

According to the improvement plan, three fully licensed companies?Korea Investors Service, Korea Ratings Corporation, and NICE Credit Rating?and one partially licensed company, Seoul Credit Rating, are currently operating. The annual sales volume is approximately 140 billion KRW, with Korea Investors Service generating 53 billion KRW, Korea Ratings Corporation 42.5 billion KRW, and NICE Credit Rating 43.6 billion KRW, showing similar market shares. Seoul Credit Rating is authorized to rate commercial paper, short-term bonds, and asset-backed securities excluding corporate bonds, with sales of 3.6 billion KRW, accounting for only 2.5% of the market share.

These rating agencies have recently shown competitive behavior, such as a decrease in fees as issuers switch rating agencies more frequently, and a slight increase in the split rate where different rating agencies assign different ratings to the same issuer. The annual default rate of rated companies has also decreased from 3.8% in 2009 to 0.44% last year, and the average rating maintenance rate over the past five years is 86.3%, indicating improved accuracy and stability of ratings. Satisfaction levels among institutional investors and experts surveyed have also improved.

However, the number of issuers requesting ratings from rating agencies has stagnated at 889 from 2014 to last year. Since the number of issuers is limited and issuers pay fees to rating agencies for evaluations, it is pointed out that issuers have stronger bargaining power than rating agencies. This implies that rating agencies may provide favorable ratings to issuers to secure evaluation contracts.

Moreover, given the small size of the domestic credit rating market and the limited "market discipline" that negatively impacts the reputation of credit rating agencies issuing low-quality ratings, the general consensus is that easing market entry would not necessarily lead to improvements in credit rating quality. A Financial Services Commission official explained, "In major overseas countries like the U.S., the market size is large enough to filter the quality of credit ratings. In Korea, institutional investors do not independently assess credit ratings, so market functions are weak."

The Financial Services Commission plans to focus on strengthening market discipline and additional institutional improvements to enhance credit rating quality rather than expanding market entry, as accumulating evaluation experience and verifying rating capabilities over a long period are crucial in credit rating operations. In major countries such as the U.S. and the European Union (EU), the market is dominated by three rating agencies?S&P, Moody's, and Fitch?that have operated for a long time. A Financial Services Commission official stated, "It is difficult for new entrants to quickly gain market trust, and there were many concerns that rapid expansion policies could have negative effects such as rating inflation rather than positive outcomes."

Since the Evaluation Committee suggested that the licensing system should be improved mid- to long-term to enhance predictability and effectiveness of market entry in the credit rating market, the Financial Services Commission plans to consider measures such as granting new licenses after a certain period of accumulated evaluation history and market assessment, modularizing licensing units (allowing unit licenses), and permitting third-party commissioned evaluations before formal licensing.

This content was produced with the assistance of AI translation services.