Study on the feasibility of alternatives to credit ratings: final report

This study maps the various alternatives to external credit ratings that are currently being used by market participants across Europe. These include: (i) internal measures and ratings where bulk of the analysis is performed in-house by the investor using qualitative and qualitative information collected from a variety of sources; (ii) market implied ratings e.g. bonds/ equity pricing information, CDS spreads; and (iii) accountancy based measures such as profitability and leverage ratios. Third party assessments conducted by non-commercial entities such as the OECD and Central Banks are also considered as an alternative to ratings produced by Credit Rating Agencies. The study then assesses the feasibility of implementing the identified alternatives in a European context based on a consideration of criteria such as costs, market acceptability, accuracy and reliability, comparability, suitability for regulatory purposes etc. while drawing lessons from the US experience of implementing the Dodd-Frank Act of 2010 which, inter alia, requires all relevant US agencies to remove all regulatory references to or requirements of reliance on credit ratings and substituting these with alternative standards of creditworthiness.