GLOBAL - The International Monetary Fund (IMF) has urged regulators to rely less on credit ratings agencies (CRAs), as the way ratings are employed has "inadvertently" led to financial instability in the recent global crisis.
The report also said the way ratings were employed as sell triggers should be examined.
It called for changes in the way ratings were integral to legislation and argued that they should not be featured in policies set out by a country's central bank.
It further singled out the 'big three' ratings agencies of Fitch Ratings, Moody's and Standard & Poor's , as these companies were "truly global and broad in their product range", also examining the issue of sovereign debt more closely than any of its smaller competitors.
The IMF also said policymakers should discourage the mechanistic use of ratings in contracts, "including investment manager internal limits and investment policies".
However, it conceded that smaller institutions and individuals would remain reliant on the agencies and that any policy to curtail their use should target larger companies.
The IMF also insisted that, where the use of ratings was unavoidable, regulators should strictly monitor how they were compiled.
The report said: "It is important the authorities continue efforts to push CRAs to improve their procedures, including transparency, governance and the mitigation of conflict of interest."
Measures suggested included more transparency in how ratings were validated, as well as over-smoothing both downgrades and upgrades.
However, the IMF concluded that credit ratings still played an important and positive role in markets, as their economies of scale allowed them to provide "cost-effective information services that increase the pool of potential borrowers" and promote liquid markets.
It added: "The CRAs' discriminatory power of sovereign default risk is validated to some extent.
"For example, all sovereigns that defaulted since 1975 had non-investment-grade ratings one year ahead of their default."