Credit rating agencies are not keen on regulators’ calls for them to introduce separate ratings scales for structured finance products, but there are a host of other reform ideas in the cards.

Speaking as part of a panel discussion on securitization at the annual meeting of the International Organization of Securities Commissions in Paris today, Paul Taylor, group managing director with Fitch Ratings, indicated that the rating agencies have heard from investors that they don’t want the agencies to introduce a separate category for rating structured finance products.

Taylor suggested that regulators and supervisors might want them to introduce a separate scale, but he maintained the market doesn’t want that — instead, many investors want comparability in their ratings between structured finance products and conventional debt. He suggested that any such change would merely be cosmetic, and that investors would just end up having to map any new ratings back to the existing scale. Instead, he proposed that investors would get more value out of efforts by the rating agencies to add more information to the current rating.

However, Malcolm Knight, general manager of the Bank for International Settlements, disputed the notion that the market doesn’t want a separate scale for credit ratings. He also said that the agencies already produce a variety of ratings scales, so that shouldn’t be an issue.

Knight, who gave the keynote address on the subject, refuted the idea that the “tail has been wagging the dog” in the securitization area. He argued that it’s wrong to think of what happened in the U.S. sub-prime market as a tail risk — a relatively unlikely event — that materialized and shook up an otherwise healthy securitization business. Rather, he maintained, that it was entirely predictable that U.S. housing markets were overvalued, and that delinquencies would likely increase over time. And, he pointed out that a number of organizations, including the BIS and the IMF, identified those risks.

He argued that tail risk wasn’t the problem, but weaknesses in risk management, inadequate investor due diligence, and inordinate product complexity, among other things, are to blame for the credit crunch. Securitization can be saved, Knight said, by redressing some of the weaknesses revealed by the market disruption.

While the market will help heal securitization, the question is what role can regulators play. Indeed, IOSCO released a report by a task force that has been studying the subprime crisis since last year, and it calls for further study on a host of subjects, aimed at improving transparency, enhancing risk management, encouraging better due diligence, and addressing various accounting issues.

One thing that will help, noted Ceyla Pazarbasioglu, division chief, capital market development and financial infrastructure at the IMF, more guidance for banks on hw to classify assets. She also proposed the idea of requiring banks to maintain larger capital and liquidity buffers when times are good as a defence against pro-cyclicality (the market’s tendency to inflate credit bubbles to extreme levels).

Pazarbasioglu also warned that it would be wrong to change accounting rules, such as abandoning fair value accounting, at the height of the crisis, and she questioned what could really be a viable alternative to fair value.

The panel’s moderator, Jochen Sanio, president of the Federal Financial Supervisory Authority in Germany, pointed out that another issue that must be faced is the quantification of reputation risk in banks. That risk is obviously viewed as significant by the banks, because they took troubled assets onto their balance sheets when they weren’t legally obligated to, for fear of the damage their reputations would suffer if they didn’t.

Sanio added that this sort of major crisis is often what’s needed to heal a flawed structure, and he warned that if the market opts for modest piecemeal reforms, it will end up going nowhere.