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Tougher Sanctions Likely to Cause a Series of Down and Upsides

By Sally Maison
Published: Thursday, October 1st, 2009

Stricter regulations by the government will only keep them from giving accurate reports, says a group of credit rating agencies. However, some analysts perceive that new laws will do a lot of good. A draft of a new credit rating legislation is currently circulating in congress. Different financial sector firms keep close track of proceedings since the decision can hugely affect the country’s financial condition.

Tougher Sanctions Likely to Cause a Series of Down- and UpsidesMembers of the Nationally Recognized Statistical Rating Organization (NRSRO) says the proposed bill in congress, which aims to place greater fines on rating agencies, will only hamper their ability to give fair reports. Securities and Exchange Commission, the same federal branch that regulates NRSRO, is planning to impose monetary fines on credit rating agencies for erroneous assessments. The liabilities will be computed according to estimated financial damages the errors have caused to a certain firm or city.

The House Oversight Committee is calling a hearing on Wednesday, which is expected to attract many groups from the financial sector. Among the most keenly interested is the National Association of Insurance Commissioners, which uses formulas from NRSROs to compute insurance premium of clients.

Finance analysts believe that if the bill is passed, credit rating agencies will forgo of their status as nationally recognized agencies. This will significantly decrease the pressure that the government places on them and the fines that they might incur. In other words, NRSRO might inevitably come to an end.

Specialists say that the proposed legislation may give US economy unintended benefits. Relinquishing their status as nationally recognized organizations will make rating firms less influential. It will also decrease the dependence of municipalities and businesses on credit ratings for their financial decisions.

Critics already pointed out earlier this year that such firms impose too much influence on financial and fiscal decisions. Critics say that borrowers and lenders alike rely too much on NRSROs. They add that investors can finally work on their own if firms like Moody’s and Standard and Poor’s become less influential.

Experts also say that diminishing NRSROs to ordinary organizations will relieve the government burdens of having to monitor the firms closely. Removing official recognition can also stimulate greater competition in the rating industry. It could significantly enhance check and balances in the rating business, which will lead to better and fairer reports from the industry.

Specialists pointed out though it could take very long before such things happen. For now, they say that everything is still hypothetical, and the rest will have to be place on the hands of policymakers.

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