This brief focuses on the role of the credit ratings agencies (CRAs) in the securitization process and the options for reform. Despite the recent financial crisis, most regulators appear intent on continuing to rely on CRA ratings for overseeing the institutions they supervise. Further, legislation in the US and the EU appears to be moving in uncoordinated directions, threatening the integration of world credit markets. Yet, the problems underlying the failures of the CRAs, and their consequences for financial efficiency and stability, are so complex and dynamic that policymakers should be very cautious about excessively prescriptive legislation because of the very real prospect of unintended consequences. A more subtle approach is needed.
The proposal here is to establish a private Board with a public mandate to set standards and to encourage their adoption. This Securitization Transaction Approval Review (STAR) Board of leading participants in securitization markets would have the mandate to improve the transparency of these markets and to realign the incentives of each agent, including the CRAs, with those of final investors.