Since the financial crisis accelerated in 2008, there has been a search for a solution to the problem of investors, including banks, relying on rating firms.
It is widely recognized the rating firms’ issuer pays model provides an incentive to rate securities as more creditworthy than they really are. This incentive is so strong rating firms assigned ratings to opaque, toxic mortgage-backed securities. Securities that even they testified before Congress they didn’t have the information they needed to actually assess.
So what can be done?
The way to end the reliance on the rating firms is to ensure every investor has access to all the information they need so after doing their own due diligence they can know what they own. Securities that carry a label from the Transparency Label Initiative meet this criteria.
Please note, investors might do the due diligence themselves or they might hire trusted third parties to do the due diligence for them. What is important is by making access to all the information easily available to investors, investors no longer need to rely on rating firms. Instead, they can turn to the expert the investor thinks is best at assessing the disclosed information.
When investors can choose to do the due diligence themselves or a specific third party expert to do the due diligence for them, this ends reliance on rating firms.