Iosco blames widespread credulity for credit crisis
Investors trusted credit ratings agencies too much, and the agencies themselves were too trusting of their clients, according to a white paper out this week from the International Organisation of Securities Commissions (Iosco).
Iosco said too many investors had "relied on credit ratings as their sole method of assessing risk", which meant that a sudden loss of confidence in the agencies left the investors adrift without any independent guidance; "this in turn caused the market for the securities to dislocate".
The agencies were also at fault, Iosco said, raising the concern that "in some cases some agencies relied on information that, on its face, appeared questionable..., uncertain or of dubious quality. Although agencies cannot be expected to uncover issuer fraud or conduct the level of confirmation expected of independent auditors, ratings based on information that fails to pass even a basic sniff test – or, more importantly, methodologies which fail to take into consideration market changes that may have an impact on the quality of the information upon which the ratings are based – fundamentally undermine investor confidence in the rating process".
Iosco called for agencies to publish historical records of rating changes, to allow investors to put current ratings in perspective. It also recommended agencies pay more attention to the quality of data they use, and that consulting businesses (which advise on the construction of structured products) should be kept isolated from the rating business. Furthermore, it suggested, downgrades could be handled by a different team from that responsible for initial ratings.
See also: Kirnon: Agencies and banks can do more for transparency
Moody's caves on muni bond ratings
Banks relied too much on ratings, supervisors say
A matter of trust
Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.
To access these options, along with all other subscription benefits, please contact info@risk.net or view our subscription options here: http://subscriptions.risk.net/subscribe
You are currently unable to print this content. Please contact info@risk.net to find out more.
You are currently unable to copy this content. Please contact info@risk.net to find out more.
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. Printing this content is for the sole use of the Authorised User (named subscriber), as outlined in our terms and conditions - https://www.infopro-insight.com/terms-conditions/insight-subscriptions/
If you would like to purchase additional rights please email info@risk.net
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. Copying this content is for the sole use of the Authorised User (named subscriber), as outlined in our terms and conditions - https://www.infopro-insight.com/terms-conditions/insight-subscriptions/
If you would like to purchase additional rights please email info@risk.net
More on Regulation
Industry calls for major rethink of Basel III rules
Isda AGM: Divergence on implementation suggests rules could be flawed, bankers say
Saudi Arabia poised to become clean netting jurisdiction
Isda AGM: Netting regulation awaiting final approvals from regulators
Japanese megabanks shun internal models as FRTB bites
Isda AGM: All in-scope banks opt for standardised approach to market risk; Nomura eyes IMA in 2025
CFTC chair backs easing of G-Sib surcharge in Basel endgame
Isda AGM: Fed’s proposed surcharge changes could hike client clearing cost by 80%
UK investment firms feeling the heat on prudential rules
Signs firms are falling behind FCA’s expectations on wind-down and liquidity risk management
The American way: a stress-test substitute for Basel’s IRRBB?
Bankers divided over new CCAR scenario designed to bridge supervisory gap exposed by SVB failure
Industry warns CFTC against rushing to regulate AI for trading
Vote on workplan pulled amid calls to avoid duplicating rules from other regulatory agencies
Bank of Communications moves early to meet TLAC requirements
China Construction Bank becomes last China G-Sib to release TLAC plans
Most read
- Top 10 operational risks for 2024
- Top 10 op risks: third parties stoke cyber risk
- Japanese megabanks shun internal models as FRTB bites