The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) lays out a different world in which credit rating agencies and users of ratings must operate.1 The premise is that requiring credit rating agencies to share underlying information would allow users to verify ratings independently and prompt agencies to issue more reliable ratings. This presupposes that users of ratings can recreate ratings as efficiently as a credit rating agency and inadvertently exposes users to greater uncertainty.
The situation of national banks demonstrates the dilemma that all regulated users of credit ratings may face. Whereas a bank currently may purchase a security on the strength of its credit rating, soon it may have to defer the purchase while it conducts an independent analysis of the creditworthiness of the obligor. The risk is that banks may change the manner in which they make investments by curtailing purchases of smaller issuers and limiting market liquidity.
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