IMF report critical of ratings agencies, demands reform

A working paper published by the IMF is urging reform of ratings agencies because of ongoing deficiencies.

The paper – Are Rating Agencies Powerful? An Investigation into the Impact and Accuracy of Sovereign Ratings – suggests that there are significant problems associated with the way credit rating agencies work, especially given their impact on the pricing of debt.

“We find that Credit Rating Agencies (CRA)’s opinions have an impact in the cost of funding of sovereign issuers and consequently ratings are a concern for financial stability,” the paper’s authors write in their conclusion.

“While ratings produced by the major CRAs perform reasonably well when it comes to rank ordering default risk among sovereigns, there is evidence of rating stability failure during the recent global financial crisis. These failures suggest that ratings should incorporate the obligor’s resilience to stress scenarios. The empirical evidence also supports: (i) reform initiatives to reduce the impact of CRAs’ certification services; (ii) more stringent validation requirements for ratings if they are to be used in capital regulations; and (iii) more transparency with regard to the quantitative parameters used in the rating process.”

The IMF states that the findings represent the views of the authors, but not the official view or policies of the organisation.



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