The changing face of ratings

What does the market want from ratings?
A rating has always been an independent opinion about credit risk and the market expects ratings to perform effectively as a benchmark of credit risk. This means that ratings should be relatively stable, especially at higher levels. While most investors accept that ratings can and will change over a cycle, they don't expect sudden and dramatic changes. Second, people expect ratings to be broadly comparable across asset class, geography and time. Finally, ratings should be transparent, which means that the market should be able to understand the criteria and reason for a rating, and what might cause a rating to change. 

How close are we to seeing an international regulatory framework for credit ratings being established?
The G20, including many countries in Asia, has committed to a globally coordinated approach to registering and overseeing credit rating agencies in all major markets. This is important to market participants who want a consistent approach to regulation and ratings. If consistently applied, regulation will help strengthen market confidence in ratings. In practice, this is not easy to achieve given that regulation must be developed at the national level and in some cases, regulatory proposals in different countries do vary significantly. We have been meeting regularly with regulators and legislators around the world to discuss these differences and the practical implementation of the regulations so markets can function as smoothly as possible. It's important to note that rating agencies are already regulated in many countries and regions including the US, Europe, Australia, and soon in Japan. 

What role did the credit agencies play pre-crisis? How is this changing?
The fundamental role of credit rating agencies is unchanged. And that is to provide an independent opinion on creditworthiness. Recent events, however, have encouraged better understanding of ratings and a more appropriate use of them in the future. We've met with hundreds of stakeholders around the world to discuss the role of ratings and have also worked harder to provide greater transparency in our analysis. We have made many changes to our analytics, our governance and the information we provide to the market, drawing on lessons from the crisis.

Moving forward, ratings and ratings research will increasingly compete on their quality and value as analytical tools and not because investors feel mandated by regulation to use them. We have urged policymakers to revisit how ratings are used in regulation, to avoid the risk of investors using them for purposes they weren't designed for or to the exclusion of other analysis. We have never advocated regulatory use of independent ratings.

Can Asia stave off the ripple effects from Europe's ongoing sovereign credit problems?
In large part, Asian sovereigns are unlikely to be hard hit by the problems in Europe although financing costs could rise somewhat. Most governments in the region are much less indebted and are running smaller fiscal deficits than the European governments that are now in the spotlight. Importantly, thanks to higher savings rates here, most governments finance their borrowing needs locally. Even governments with large debt burdens (such as Japan and India) can count on steady domestic demand for their paper. This contrasts with the heavy reliance of some European governments on foreign funding.