Open-Source Credit Ratings

When I was working with analysts in the financial sector in the late 90's and early 2000's I found an interesting contrast between the credit ratings agencies (S&P, Moody's etc.) and the investment banks in their methods for estimating probability of default in portfolios of loans (using, at the time, S-PLUS). Or rather, a lack of contrast: although the details differed, it seemed to me that they were using fundamentally the same modeling techniques and -- crucially -- the same data sources and histories to make their estimates. Perhaps if the banks had known at the time that the ratings agencies weren't really giving them anything like independent estimates of risk, our problems with credit-default swaps wouldn't have been quite so severe. (Also: I want a pony.)

So maybe it's a good sign that European regulators appear to be moving towards an open-source model for calculating ratings: 

New rules for Credit Ratings Agencies include the following:

Credit rating agencies may not provide advisory services.

They will not be allowed to rate financial instruments if they do not have sufficient quality information to base their ratings on.

They must disclose the models, methodologies and key assumptions on which they base their ratings.

They must differentiate the ratings of more complex products by adding a specific symbol.

(My bold.) More here:

Asymptotix: Is The European Union Legislating The Ratings Process Towards An Open Source Model?

Comments

[Alex]

Aren`t rating agencies have a wider access to proprietory data like even positions?

[David Smith]

The ratings agencies do have access to different data sources, and I didn't mean to imply the models were exactly the same. But in broad strokes, the same *kinds* of data were used for practically all the models (even if the exact values weren't identical from agency to agency). And more importantly, none of the models used very long histories (probably because the data simply weren't available): 10-20 years was the norm as I saw it.

[Peter Lindmark]

The updated link is the following: http://www.asymptotix.eu/content/european-union-legislating-ratings-process-towards-open-source-model

[David Smith]

Thanks, I've updated the link.

[John Beck]

The credit ratings are important source to detect the success of diversified companies via credit control and credit ratio detections , these help in rating the business flow accordingly .