FSB points way to reduced reliance on credit ratings agencies

"Banks, market participants and institutional investors should be expected to make their own credit assessments, and not rely solely or mechanistically on CRA ratings." That's Principle 2 of the new guidance from the Financial Stability Board, the Group of 20's collective think-tank and policy-shop. Principle 1, more long-winded, is of interest, too: "Standard setters and authorities should assess references to credit rating agency … ratings in standards, laws and regulations and, wherever possible, remove them or replace them by suitable alternative standards of creditworthiness." Collectively principles like those two would in another setting be enough to destroy the business models of established players. Imagine the governments of the world ordering public and private sector organisations not to use DDT because it was a health hazard, or CCFs because they damage the ozone layer.

If put into force – and that's a big IF – borrowers wouldn't have to have credit ratings, and new methods of assessment of credit risk might emerge, with new approaches to solving the problem of being able to assess from afar how secure a borrower's flow of funds are. Yes, we suspect, even if the FSB is successful, it won't put the rating agencies out of business. But perhaps their business will become what they've always said it was: information, not ersatz policy.

Source document: The FSB statement is a seven-page pdf file.