The recent financial crisis has made credit rating agencies the target of greater scrutiny. There is no denying that closer attention needs to be paid to the business models of the big three agencies and, the push for greater transparency around these organizations is certainly justified.
However, by placing the blame solely on credit agencies, the industry is ignoring a much bigger issue: how financial services firms have become dependent on credit ratings as a single source of data for making key trading and investment decisions.
Over reliance can be a dangerous game in any situation, let alone when the markets can move drastically at the drop of a hat (or rating), and there is increasing pressure from regulators and investors to obtain the best possible outcomes for clients under best execution requirements.
So we suggest looking at a credit rating assessment as just one piece of the puzzle. Comparing multiple data sources and importantly, critically analyzing the results, is the only way to achieve a truly accurate assessment of investments.
Indeed, credit rating analysis should be checked against sales data, historical data and pre-payment information as well as data from niche providers to create well-rounded, validated intelligence that can properly inform decision-making.
It’s time for firms to consider the steps that need to be taken to end the over reliance on the ratings agencies that has characterized the industry for too many years.