Global Push for Rating Agency Reform
In the aftermath of the global financial crisis, the Basel Committee and the Financial Stability Board urged jurisdictions to strip out mechanistic references to external credit ratings from regulations. Australia, a relatively late mover, has accelerated its efforts through 2025 and 2026. APRA now requires banks and insurers to develop robust internal credit assessment capabilities, rather than automatically relying on ratings from S&P, Moody’s or Fitch. The goal is to reduce cliff effects and procyclicality, where a sudden downgrade can force a fire sale of assets. This shift does not eliminate the role of credit rating agencies, but it democratizes credit analysis and builds institutional resilience.
ASIC’s 2026 Report on CRA Oversight
The Australian Securities and Investments Commission released Report 789 in May 2026, a comprehensive review of the conduct and governance of credit rating agencies operating in Australia. ASIC found that the number of regulatory mandates explicitly referencing external ratings had fallen by 40 percent over five years, with the remaining references concentrated in liquidity and securitisation frameworks. The report highlighted that while the Big Three agencies still dominate, Australian institutions are increasingly using ratings as one input among many, cross‑checked against proprietary models. ASIC also flagged the need for continued surveillance of unrated debt markets, where growth is rapid but transparency is weaker.
Impact on Major Banks’ Capital Requirements
The most tangible outcome of reduced rating reliance is visible in APRA’s revised capital standards for authorized deposit‑taking institutions. Effective January 2026, for unrated corporate exposures, banks can use internal risk weights rather than applying a standardized 100 percent risk weight previously tied to the absence of a rating. This change, embedded in the implementation of Basel III reforms, enables banks to lend to smaller, unrated businesses on more favourable terms, supporting economic growth. It also encourages credit rating agencies to innovate and offer more tailored analytical services beyond the traditional letter rating, thereby reshaping their business model within Australia’s evolving financial system.