Financial Reforms We Can All Agree On - WSJ.com

Financial Reforms We Can All Agree On - WSJ.com: "6) Avoid grade inflation in rating agencies' opinions. Lots of bad ideas are surfacing about how to accomplish that goal, one of which is to require that buyers, not sellers, pay for ratings. This would not improve the reliability of ratings. Regulated, buy-side investors (banks, pensions, mutual funds and insurance companies) pushed for ratings inflation of securitized debts to loosen restrictions on what they could buy. Giving these buyers more power would not discourage ratings inflation. Another bad idea gaining ground in Europe is to have regulators micromanage the ratings process, which would be destructive to the ratings' content.

There are better alternatives, one of which is to force ratings to be quantitative. Letter grades have no objective meaning that can be evaluated or penalized for inaccuracy. Numerical estimates of the probability of default (PD) and loss given default (LGD), in contrast, do have objective, measurable meanings.

The Nationally Recognized Statistical Rating Organizations (NRSROs) whose ratings are used by regulators should provide specific estimates of the PD and LGD for any rated instrument (they already calculate and publicly report the necessary statistics). Requiring these organizations to express ratings using numbers could alter the rating agencies' incentives dramatically. If they were penalized for systematically underestimating risk over a significant period of time -- say, with a six-month 'sit out' from having their ratings used for regulatory purposes -- they would have a strong self-interest in correctly estimating risk."

-------------------------------------

Comment

The issue is not so much alphabetical versus numerical as it is an issue of further granularity in rankings
See my book chapter VIII:

 

My recent output on proposals for reform:

Unity of Purpose




http://www.youtube.com/watch?v=70ciLLjpS4U


http://www.authorstream.com/PresentLive/kongtcheu-179123-UnityofPurpose2-Business-Finance-ppt-powerpoint


http://www.authorstream.com/Presentation/kongtcheu-179123-UnityofPurpose2-Business-Finance-ppt-powerpoint/


Uploaded on authorSTREAM by kongtcheu


Too Big to Fail





http://www.youtube.com/watch?v=YzO6_CusfL8



http://www.authorstream.com/Presentation/kongtcheu-179114-TooBigtoFail-Business-Finance-ppt-powerpoint/

http://www.authorstream.com/PresentLive/kongtcheu-179114-TooBigtoFail-Business-Finance-ppt-powerpoint



Uploaded on authorSTREAM by kongtcheu