Private Credit: Much Ado About Nothing—Perspectives on Columbia Business School Paper About Private Ratings

The Columbia Business School’s Rating Without Market Discipline paper raises important questions regarding the growth of private ratings in U.S. life insurers’ portfolios and the interaction between ratings and regulatory capital. The paper concludes that privately rated bonds understate credit risk, experience higher subsequent impairment rates, and contribute to lower required capital than comparable publicly rated bonds.¹  

This KBRA research reviews the paper’s methodology and its interpretation of the evidence. Our objective is not to argue that private ratings should be exempt from scrutiny. Rather, it is to help fixed income investors evaluate whether the evidence presented in the paper supports the breadth of its conclusions—which, we believe, they do not (see below). Put differently, the paper’s rhetorical emphasis is on systemic risk, policyholder welfare, widespread rating inflation, and the absence of market discipline, while its…