Ratings and banking regulation : a shift from productive (Basel II), to contradictory (EBA-GL LOM and supervisory practices), to dangerous (Basel 3+ and CRR3)

External ratings (agency ratings) and internal ratings were already in use before Basel II, as powerful management tools. Basel II "adopts" them (the former in the Standard approach, the latter in the IRB approaches) in a productive way: internal ratings represent the final summary of the creditworthiness assessment of debtors/transactions, to be used both in lending/review processes and in those aimed at regulatory capital adequacy measures, to be developed with a medium to long-term target horizon, leaving banks with the discretion to choose the assignment methods, as long as all relevant information (including qualitative and forward-looking data) is included in the judgment. Instead, in the EBA-GL LOM and supervisory practices, internal ratings are predominantly the result of statistical tools in which the role of behavioural information is much broader compared to that of qualitative, strategic, and prospective information; they target short-term forecasting horizons, approaching early warning systems used in ongoing monitoring; and they are often definitively approved by bank officers different from those who underwrite the loans. Basel 3+ confirms the Basel II framework, ignores the contradictions in the EBA-GL LOM and supervisory practices, and generates the false perception that internal ratings are no longer essential. In addition, CRR3 emphasizes the use of external ratings also in the SMEs segment and encourages the creation of new rating agencies (including those linked to central banks), thus pushing toward a commodity-oriented logic in bank-SMEs relationships (in contrast with the EBA-GL LOM). One may wonder whether the evolution of the role and content of ratings in regulations and supervisory practices is the result of a deliberate, conscious shift in approach or if it is simply the outcome of the occasional predominance of differing positions, without any central authority, even a "Czar of ratings."