* Removal of references to credit ratings recommended
* FSB package to go to G20 leaders in Seoul in November
* US financial reform law takes similar approach
By Kevin Drawbaugh
WASHINGTON, Oct 27 Global regulators called on
national authorities on Wednesday to curb the role of credit
rating agencies in the financial system, challenging the value
of an industry widely criticized in recent years.
The Financial Stability Board (FSB) issued recommendations
calling for the elimination "wherever possible" of references
to credit ratings in legal statutes and business practices, and
for the development of new and better ways to assess risk.
The FSB statement throws down a challenge to the world's
Big Three credit rating agencies: Moody's (MCO.N), Standard &
Poor's MHP.N and Fitch Ratings (LBCP.PA).
The agencies have been criticized for failing to flag the
risks built up in world banks and financial firms ahead of the
2007-2009 credit crisis that shook the world financial order
and triggered an international surge of reform proposals.
The FSB said its broad principles would "reduce the
financial stability-threatening herding and cliff effects that
currently arise from (credit rating agency) rating thresholds
being hard-wired into laws, regulations and market practices.
It said the principles, if widely adopted, would help "end
mechanistic reliance by market participants and establish
stronger internal credit risk assessment practices."
The FSB is a panel of regulators, central bankers and
treasury officials from the member nations of the Group of 20
(G20) leading economies. The credit rating agency
recommendations are expected to be considered by G20 leaders at
a summit meeting in Seoul in November.
"Standard setters and authorities should develop transition
plans and timetables to enable the removal or replacement of
references to (credit rating agency) ratings wherever
possible," the FSB said in a statement.
Banks, market participants, institutional investors,
investment managers and central banks should make their own
credit assessments, and not rely too much on the work of credit
rating agencies, said the statement.
"At the same time, (credit rating agencies) play an
important role and their ratings can appropriately be used as
an input to firms' own judgment," it said.
The sweeping financial reform legislation enacted into law
in July by the United States removed references to credit
ratings in some key statutes and ordered regulators to locate
remove other such references in laws where possible. The
European Union is considering similar measures.
FSB chief Mario Draghi said last week that regulators would
make the recommendations on credit rating agencies. The FSB is
preparing a series of reports on improving global financial
regulation to present at the Seoul G20 meeting.
(Editing by Kim Coghill)