By John Kiff
One of the earliest take aways from the global financial crisis was the importance of access to information for effectively functioning financial markets. And, in that regard, credit ratings can serve an incredibly useful role in global and domestic financial markets—in theory.
In practice, credit ratings have inadvertently contributed to financial instability—in financial markets during the recent global crisis and more recently with regard to sovereign debt. To be fair, the problem does not lie entirely with the ratings themselves, but with overreliance on ratings by both borrowers and creditors.
In one of the background papers for the Fall 2010 Global Financial Stability Report that I prepared with IMF colleagues, we recommend that regulators should reduce their reliance on credit ratings. Markets need to end their addiction to credit ratings. (more…)
Filed under: Advanced Economies, Economic Crisis, Financial Crisis, International Monetary Fund | Tagged: Basel II, credit ratings, credit ratings agencies, financial markets, GFSR, global financial crisis, sovereign debt, sovereign risk | 16 Comments »