Credit rating agencies (CRA)
must be toppled from their position as arbiters of risk, believes
global financial watchdog, the Financial Stability Board
(FSB).
Backing its view, the FSB has
called on governments to remove credit ratings from laws and
regulations determining parameters of financial institutions’ asset
allocation.
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In its call, the FSB has the
backing of the Group of 20 (G20), comprising finance ministers and
central banks of the 20 largest economies. Formed in 2009 to advise
on reforms of global financial markets, the FSB’s members include
all G20 central banks.
Alluding to the global
financial crisis in which ratings proved seriously flawed, the FSB
noted that the “official seal of approval” given by regulators to
ratings gave them credibility beyond their true level of
reliability.
Reliance on ratings has also
resulted in an undesirable decline in many banks’ and institutional
investors’ own ability to assess credit risk, added the
FSB.
The trend in the US appears
to be towards removing CRAs from the central role they play. A
study by consultancy Robert E Nolan, which examined a broad cross
section of the US life industry, found that insurers intend on
placing less reliance on ratings by CRA and more on their own
assessments of credit risk.
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By GlobalDataSeemingly of similar opinion
to that of the FSB, European Union executive body the European
Commission (EC) has issued a consultation paper calling for comment
on proposed measure to reduce reliance on CRAs.
In a statement, the EC said: “There are growing concerns
that financial institutions and institutional investors may be
relying too much on external ratings and do not carry out
sufficient internal credit risk assessments, which may lead to
volatile markets and instability of the financial
system.”
