Reducing Reliance on CRA Ratings
In October 2010, the FSB issued Principles for Reducing Reliance on CRA Ratings. The goal of the FSB Principles is to end mechanistic reliance on CRA ratings by banks, institutional investors and other market participants by reducing the “hard wiring” of CRA ratings in standards, laws and regulations and by providing incentives for firms to develop their own capacity for credit risk assessment and due diligence.
The FSB Principles recognise that CRAs play an important role and their ratings can appropriately be used as an input to firms’ own judgement as part of internal credit assessment processes. But any use of CRA ratings by a firm should not be mechanistic and does not lessen its own responsibility to ensure that its credit exposures are based on sound assessments.
The financial stability objective does not imply a view on whether CRA ratings are better or worse than lenders’ or investors’ own credit assessments. Instead it encourages a diversity of views and appropriate due diligence.
It proceeds from the basis that financial institutions should not invest in credits that they cannot themselves analyse.
At the same time, it does not imply that market participants should avoid all use of credit ratings, as long as they combine the use with exercise of their own judgement.
Nor do the Principles imply that market participants should mechanistically rely on someone else, other than CRAs, to provide credit ratings. This could lead to procyclicality in the same way as the use of CRA ratings.