FSB calls for less reliance on Credit Rating Agency

09:24, October 28, 2010      

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The Financial Stability Board (FSB) of the Bank for International Settlements (BIS) in Geneva published on Wednesday a report advocating less reliance on Credit Rating Agency (CRA) ratings so as to reduce financial instability.

The report, titled "Principles for Reducing Reliance on CRA Ratings," suggests reducing and even removing whenever possible the use of CRA ratings, "hard-wired" in many standards, laws and regulations.

The current practice of over-reliance would generate "herding and cliff effects" that undermines financial stability, as was demonstrated in the financial crisis, says the report.

Apart from legal and regulatory level, the report also calls on banks, market participants and institutional investors "to make their own credit assessments, and not rely solely or mechanistically on CRA ratings."

"Central banks should reach their own credit judgments on the financial instruments," and their "policies should avoid mechanistic approaches that could lead to unnecessarily abrupt and large changes in the eligibility of financial instruments and the level of haircuts that may exacerbate cliff effects," said the report, emphasizing Central banks' role in leading the process.

According to BIS, the progress on the de-reliance issue will be reported to the G20 finance ministers and central bank governors in 2011.

The CRAs have been widely criticized for their roles at various stages in the subprime crisis. By understating the risks involved with new, complex securities, they have fueled the United States housing bubble, through instruments such as Mortgage-Backed Securities (MBS) and Collateralized Debt Obligations (CDO).

Source: Xinhua


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