Reducing Over-Reliance on Credit Rating Agencies

Abstract

This paper provides an overview of recent credit rating-related initiatives in the US and EU, including those at the level of some of the world's leading central banks, together with an assessment of the remaining challenges. The authors argue that (i) notwithstanding concerns over the objectivity and reliability of their ratings, credit rating agencies have, by and large, offered reasonably good estimates of credit quality, (ii) careful consideration is necessary before settling with alternatives, as opposed to complements, to their ratings, (iii) greater transparency in issuer financial information, and improvements in the internal assessment capabilities of financial firms are pre-requisites if reliance on credit ratings is to be further reduced. The authors also conclude that, while central banks have done a lot to reduce their reliance on credit ratings, any further decoupling of their collateral frameworks from credit ratings, beyond the field of sovereign issues, will pose a considerable challenge for them.