October 31, 2011

More than how the credit ratings are determined, it is how these are used that is important.

Sir, Gene B. Phillips makes some very common sense comments on the proposals in Brussels concerning credit ratings and the credit rating agencies. “Don’t see rating agencies all as one” October 31. That said both Mr. Phillips and all those in Brussels fail completely to identify the most important changes that need to occur, with respect to how those ratings are used by the regulators.

The first is that regulators should concern themselves more with the fact that credit-ratings could be wrong, instead of betting it all, as they have done with the capital requirements based on perceived risk, on the human fallible credit risk raters being correct.

Second, the regulators should have no business using the credit ratings to play risk-managers for the world, by means of assigning the risk-weights that determine the effective capital requirement for banks. Instead they should concern themselves more with how the bankers act and react to the credit ratings.

If the regulators had done that, they would not have placed us in the hole we now are in.