Reforms of Credit Rating Agencies Likely to Be Modest

Despite the failure of Moody’s, Standard & Poor’s and Fitch to foresee the credit crisis, regulatory reforms seem likely to keep the current dependence on the major credit ratings agencies largely intact, according to Oxford Analytica.

Regulatory authorities in the United States and now the EU continue to regard more effective CRAs as part of the solution for poor investment decisions that failed properly to assess underlying risks, and not as a major part of the problem of offloading the necessary due diligence that should predate investment in complex financial products. So far, the major regulatory approach to credit ratings problems has focused on policing the credit rating agencies.

The weaker form of these proposals focuses on policing obvious conflicts. The stronger form might, in the case of the United States — which arguably should have a more stringent regulatory role, as the headquarters of the major CRAs — create a public role for rating debt, or shift current payment arrangements so that the users of credit ratings would pay for them, possibly through means of a subscription system.

A more effective approach to credit rating woes might be to improve accountability for investment decisions.

Measures to promote such goals would not necessarily eschew greater public oversight and regulation, in OxAn’s view. They might also include:

• easier access to lawsuits, both public and private, as a means of redress for poorly managed investment decisions; and
• elimination of undue reliance on credit ratings as a proxy for investment decisions, by stripping credit ratings references from securities regulations.

Comments

[User 283977:]

I don't think increasing the ability to sue is the solution. In the end the lawyers get richer, and paralyses through fear of being sued ultimately follows.

Objectively performed credit ratings have value. What we need are accurate credit ratings objectively performed with regular validity checks. What we currently have are ratings idiosyncratically performed by non-independent individuals / organizations who appear to be working towards market manipulation.

Jan 05 01:03 PM

[User 283977:]

I don't think increasing the ability to sue is the solution. In the end the lawyers get richer, and paralyses through fear of being sued ultimately follows.

Objectively performed credit ratings have value. What we need are accurate credit ratings objectively performed with regular validity checks. What we currently have are ratings idiosyncratically performed by non-independent individuals / organizations who appear to be working towards market manipulation.

Jan 05 01:03 PM

[User 283977:]

Sorry about the double post, that was caused by a SA glitch.

Jan 05 01:04 PM

[bogeytrain:]

Simple solution here. Require all issuers to obtain a minimum of initial 4 ratings from 4 separate rating agencies, maintain 2 ratings at closing, but require the issuer to disclose the ratings from the 2 rating agencies that were dropped prior to closing.

Jan 05 05:05 PM