S&P President Pushes to Drop Ratings Requirements

February 11, 2010 by · Leave a Comment
Filed under: The Ratings System 

Deven Sharma, President of Standard & Poors, has argued for the repeal of regulations that require banks, public pensions, money market funds, and other regulated investors to hold debt evaluated by Nationally Recognized Statistical Rating Organizations (NRSROs). Standard & Poors is one of ten NRSROs, and these regulations originated in legislation following the Great Depression and have existed essentially unchanged for nearly 80 years.

The intent in the ‘30s was to prevent banks from risking their capital in highly speculative investments. The Federal Deposit Insurance Corporation (FDIC) was formed at the same time, and the regulation was, in part, intended to avoid exposing the FDIC to extraordinary risk.

Mr. Sharma speculates that, “rating mandates may have prompted some investors to use ratings in ways they were never intended.” Investors, he suggests, are confused, as they believe that NRSRO ratings are a “government seal of approval” and a short cut for evaluating an investment risk profile. Instead, Mr. Sharma maintains, the ratings should be use as only one of many tools that investors can use to analyze risk. “Hear, hear. Let’s have investors do their own due diligence.”

Instead of requiring regulated investors to hold NRSRO-rated instruments, Mr Sharma believes that the market should determine whether their assessments are used. “Our most important audience will remain the marketplace. If our ratings are valuable, people will use them. If not, market participants should not be forced to use them.”

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