The widespread use of credit ratings for these structured mortgage products gave investors a misleading sense of security because these ratings were primarily based on the idiosyncratic risks of the mortgages in the securitization pool, rather than on the systemic risk of a collapse in the U.S. housing market.
The Financial Stability Board has since introduced principles to reduce reliance on ratings from credit-rating agencies. 4  BIS central bankers’ speeches  reality. It recognizes that when market conditions are good, with low volatility and low perceived levels of risk, the haircuts charged by market participants can fall below levels that might be considered prudent from a risk-management perspective.