While ratings produced by the major credit rating agencies (CRAs) perform reasonably well when it comes to rank ordering default risk among sovereigns, there is evidence of rating stability failure during the recent global financial crisis. These failures suggest that ratings should incorporate the obligor’s resilience to stress scenarios.
The empirical evidence also supports:
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(i) reform initiatives to reduce the impact of CRAs’ certification services;
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(ii) more stringent validation requirements for ratings if they are to be used in capital regulations; and
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(iii) more transparency with regard to the quantitative parameters used in the rating process.
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© International Monetary Fund
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