Global regulators called on national authorities on Wednesday to curb the role of credit rating agencies in the financial system, challenging the value of an industry widely criticized in recent years.
The Financial Stability Board (FSB) issued recommendations calling for the elimination “wherever possible” of references to credit ratings in legal statutes and business practices, and for the development of new and better ways to assess risk.
The FSB statement throws down a challenge to the world’s Big Three credit rating agencies: Moody’s, Standard & Poor’s and Fitch Ratings.
The agencies have been criticized for failing to flag the risks built up in world banks and financial firms ahead of the 2007-2009 credit crisis that shook the world financial order and triggered an international surge of reform proposals.
The FSB said its broad principles would “reduce the financial stability-threatening herding and cliff effects that currently arise from (credit rating agency) rating thresholds being hard-wired into laws, regulations and market practices.
It said the principles, if widely adopted, would help “end mechanistic reliance by market participants and establish stronger internal credit risk assessment practices.”
The FSB is a panel of regulators, central bankers and treasury officials from the member nations of the Group of 20 (G20) leading economies. The credit rating agency recommendations are expected to be considered by G20 leaders at a summit meeting in Seoul in November.
“Standard setters and authorities should develop transition plans and timetables to enable the removal or replacement of references to (credit rating agency) ratings wherever possible,” the FSB said in a statement.
Banks, market participants, institutional investors, investment managers and central banks should make their own credit assessments, and not rely too much on the work of credit rating agencies, said the statement.
“At the same time, (credit rating agencies) play an important role and their ratings can appropriately be used as an input to firms’ own judgment,” it said.
The sweeping financial reform legislation enacted into law in July by the United States removed references to credit ratings in some key statutes and ordered regulators to locate remove other such references in laws where possible. The European Union is considering similar measures.
FSB chief Mario Draghi said last week that regulators would make the recommendations on credit rating agencies. The FSB is preparing a series of reports on improving global financial regulation to present at the Seoul G20 meeting.
(Editing by Kim Coghill)
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