In particular, the three main agencies – Moody’s, Standard & Poor’s and Fitch – are reviewing their methodologies, after being badly wrong-footed by the sharp rise in US mortgage delinquencies. They are also seeking to counter criticism that they face conflicts of interest by creating plans to appoint advisory boards and to separate sales teams from credit analysis.
However, they also recognise that these shifts are unlikely to rebuff all the public criticism. Consequently, the industry has started to warn that asset managers need to rethink the way they use these ratings.
“In the future we need to find a way to make sure that investors get information through other channels [as well as ratings],” Ray McDaniel, president of Moody’s, told a meeting at the World Economic Forum in Davos last week. “If the only choice for investors is to look to rating agencies, it makes us less effective.”
He added: “There has been a failure in some of the key assumptions which supported our analysis and modelling – the information quality deteriorated in a way that was not appreciated by Moody’s or others ... We recognise we need to retool processes.”
The comments come amid an intensifying debate about the causes of the market turmoil – a theme which dominated discussions in Davos last week and will be echoed in discreet meetings between international regulators and bankers in the coming weeks.
Last autumn it initially seemed that some policymakers were seeking to pin much of the blame for the turbulence on the rating agencies. However, after several months of dialogue, regulators now stress that they do not wish to “scapegoat” the sector.
“Rating agencies were a long way behind the curve,” said Charles McCreevy, European Union financial commissioner, at Davos. “They should not be scapegoated ... but we have put them on watch that things cannot stay the same.”
Instead, regulators are shifting their focus to consider how they can reduce the dominant role of ratings in the banking regulatory system, as well as the widespread use of ratings to calculate the level of capital that banks need to set aside to offset risks.
“The whole question of the role of ratings in the regulatory system does have to be looked at,” said Malcolm Knight, head of the Bank for International Settlements.