It its may 12-th, 2014 final Peer Review Report (download) the Financial Stability Board speaks of “reducing Reliance on CRA Ratings”. According to the FSB:
“The key challenge lies in developing alternative standards of creditworthiness and processes so that CRA ratings are not the sole input to credit risk assessment.”
As we have repeatedly pointed out in the past:
- Conventional rating models are outdated in that they don’t take into account the complex and turbulent nature of our economy.
- The techniques which they employ lend themselves to manipulation and conflict of interest (conventional rating methodologies are subjective).
- The fundamental flaw behind these methods is the computation of the Probability of Failure (PoD). The PoD is not a physically sound quantity.
In a highly turbulent regime, resilience and stability are better measures of success than mere profitability of a low PoD (high rating). We believe a more sound rating mechanism should incorporate resilience and stability of a business in order to access its state of health.
Such a rating mechanism already exists – Resilience Rating™ is available online since 2009. The tool allows SMEs as well as listed companies to self-rate themselves, measuring their resilience and stability based on Balance Sheet, Cash Flow, Income Statement or any other set of significant business parameters. See interactive examples.
A special version of the tool – the Resilience Alert System™ – offers precomputed Resilience Ratings for companies listed on Wall Street. The RAS may be accessed here.
Resilience Rating™ is science, not an opinion.