Credit rating agencies (CRAs) need to undergo significant reforms in order to enhance their accountability and effectiveness, says a new report from the C.D. Howe Institute.
In “A Question of Credibility: Enhancing the Accountability and Effectiveness of Credit Rating Agencies,” Stéphane Rousseau, Chair in Business Law, Université de Montréal, notes in the wake of the financial crisis, CRAs have been criticized for playing a significant role in the market turmoil. He critiques the regulatory responses so far by Western governments, and proposes three more effective reforms.
“Canada’s response so far, like those in the US and EU, doesn’t go far enough and arguably goes in the wrong direction by adding another layer of cumbersome regulation,” he said in a statement.
Professor Rousseau notes numerous reports have identified failures on the part of CRAs that affected the quality and integrity of the rating process. In light of the critiques, a strong consensus has emerged among policymakers that regulatory intervention is needed. In Canada, the European Union and the United States, policymakers have opted for registration systems. But registration regimes can stifle competition, induce undue reliance on ratings and burden regulators, he said.
To address these shortcomings, three major areas of reform should be pursued. The first is the elimination of regulatory reliance on ratings. The second is the development of a due diligence obligation for institutional investors with respect to the creditworthiness of issuers. The third is the disclosure of information on underlying assets by issuers of structured finance products.
To read the full report, click here. (PDF)