Reducing overreliance on credit ratings: failing strategies and the need to start from scratch

In 2010 the Financial Stability Board (FSB) issued a set of principles to deal with such a problem. The proposed strategy is based on two levels of action: (i) encouraging market participants to perform their own due diligence and internal risk management; and (ii) revisiting in the regulatory framework those references to ratings which may negatively influence investors due to their potentiality to be regarded as a public endorsement of creditworthiness. So far, the translation of the two pronged approach has made very little progress at national, regional and international levels. In this short article, Francesco De Pascalis (research degree student at IALS) illustrates the reasons why the proposed approach is failing to achieve its objectives. In doing so, it will discuss overreliance on credit ratings and the strategy advanced to address this problem, including its drawbacks and how it is perceived by CRAs and users of ratings. Significantly, the approach is considered as ill-advised and as an overreaction by the users of ratings. Consequently, this article suggests that the debate on excessive reliance should re-start on new bases.