Switzerland Pushes Alternatives To Credit Rating Reports
by Ulrika Lomas, Lowtax.net, Brussels
14 May, 2014
Switzerland has published an action plan to buoy the stability of the financial sector by reducing its reliance on research from credit rating agencies.
The Government said: "As illustrated by the financial crisis, over-reliance on ratings can pose risks to financial stability. The aim of the action plan is to mitigate these risks and thus implement the corresponding Financial Stability Board (FSB) principles."
Switzerland said that in order to reduce reliance on ratings, international standards for financial market regulation must be adapted and alternatives to CRA ratings developed. It noted that only few references to ratings have been found in Swiss laws and regulations, most of which follow international standards, such as the capital adequacy requirements of the Basel Committee on Banking Supervision (Basel III).
At national level, the plan is to undertake individual specific regulatory steps. For instance, references to CRA ratings will be removed from the Swiss Financial Market Supervisory Authority's (FINMA) Collective Investment Schemes Ordinance. Furthermore, updated disclosure requirements within banking regulation will facilitate credit assessment for market participants. Ultimately, the Swiss authorities will engage in a dialogue with financial market participants to exchange experience and knowledge on alternatives to CRA ratings and to raise awareness of possible risks.
The FSB published a set of principles for reducing reliance on ratings in 2010. In October 2012, the FSB published a roadmap with timelines to accelerate implementation of the principles. The roadmap aims to reduce mechanistic reliance on CRA ratings through standards, laws, and regulations, and to promote, and – where needed – require financial institutions to strengthen their own credit risk assessment processes as a replacement for reliance on CRA ratings. They are also to be asked to disclose information on these processes.
To support the agreed roadmap, the body then launched a peer review, involving FSB member Switzerland, to assist national authorities in a structured stocktaking of references to CRA ratings in domestic laws and regulations. The FSB intends to issue the final peer review report in the first half of 2014.
The Swiss Government emphasized that "the objective of the initiative is not to prevent the use of CRA ratings in general. After all, ratings are a valuable source of information, not least for small market participants with limited ability to perform their own analyses." Instead it intends to "engage in a dialogue with financial market participants - by way of workshops, for instance - to exchange experience and knowledge on alternatives to CRA ratings and to raise awareness of possible risks."
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