The Securities and Exchange Commission recently recommended against standardizing credit ratings, including the use of standard terminology and stress tests, but advocated enhanced transparency in the process of determining the ratings.
The report said that the implementation of such standards would prove difficult and that “the staff believes it would be more efficient to focus on the rule-making initiatives mandated under the Dodd-Frank Act, which, among other things, are designed to promote transparency with respect to the performance of credit ratings and the methodologies used to determine credit ratings,” Bloomberg reports.
Section 939(h)(1) of the 2010 Dodd-Frank Act mandates that the SEC consider requiring the use of identical ratings terms across asset classes and the use of standard economic scenarios in stress-testing financial institutions.
Inflated credit ratings contributed to the recent financial crisis, prompting legislators to search for a new method to ensure the accuracy of credit ratings. Dodd-Frank mandated that regulators discontinue the use of ratings and increase supervision of the firms responsible for issuing the ratings, according to Bloomberg.
In 1975, the SEC began using ratings in its rules, saying that only three companies could issue credit ratings: Standard & Poor, Moody’s and Fitch. Since those organizations were designated nationally recognized statistical rating organizations, that number has grown to include nine such firms.