Reform of credit rating agencies urged
London, March 28, 2011
Rating agencies need to become more transparent and less dominant if they are no longer to pose a risk to the financial system, a Bank of England research paper argues.
Debate about how to reform the ratings business has gathered pace since the financial crisis, which highlighted the agencies' failings as well as conflicts of interest.
The US Securities and Exchange Commission and the European Commission last year both introduced rules requiring greater disclosure of information in the hope of investment firms may opt to do their own research.
"Greater transparency in issuers' financial information and improvements in financial firms' capacity for internal assessment are pre-requisites for reducing reliance on ratings," the paper argues. "Since such improvements will take time, it is important that the momentum behind recent initiatives is maintained."
The paper, written by five economists at the bank, does not necessarily reflect the BoE's official view but will be closely scrutinised given the central bank's new powers of financial regulation.
It argues that abolishing rating agencies is not an option. Other gatekeepers would emerge to fill the void with their own ratings-like research and advice. Subsuming their role into a single public rating agency would also be fraught with difficulty.
To reduce systemic risk, it argues, the hardwiring of rating agency decisions into financial contracts must be reversed and agencies' governance and transparency must be improved. Deeper structural reform may also be needed, particularly in the structured finance segment of the market, to tackle conflicts of interest.
At present, ratings agencies such as Moody's, Standard & Poor's and Fitch, charge companies selling bonds, with investors getting the information free.
"Credit rating agencies can no longer be regarded solely as the providers of private goods to private markets. The crisis has demonstrated clearly that the public policy consequences of rating agencies' franchises need to be taken into account," it says. – Reuters
More Finance & Capital Market Stories
- Qatar sets up mixed business incubator
- Kuwait budget spending up 8pc in April-Jan
- Thomson Reuters to host Mena IFR awards
- ADIB offers smartphone industry investment
- Gulf Finance House to start $3bn Tunisia project
- KFH completes ICT project upgrade
- Egypt urban annual inflation slows to 9.8pc
- BIBF signs deal with Palestinian institute
- Bahrain’s GDP set to expand 12pc
- KFH-Bahrain rebrands priority banking
- Bank Nizwa wins top Islamic bank award
- Qatar labour costs may jump: IMF
- Kuwait Q3 trade surplus hits $23bn
- Dubai trade growth up 7.6pc to $362bn
- Deloitte appoints new managing director
- Al Ramz tops UAE trading in Feb
- IFC in $150m loan deal with Bank Audi
- SME funding focus for Abu Dhabi forum
- Insurance House posts second year of profit
- ETF global assets hit record $2.44 trillion
- Bahrain firms plan IPOs
- Serbia wins $1bn Abu Dhabi loan
- Key equity banker resigns from Saudi Fransi
- DMCC to boost Islamic commodity trade with tie-ups
- IDB, KIA units to invest in Morocco
- First Gulf to set up $1bn sukuk in Malaysia
- Singapore’s UOB Bullion and Futures joins DGCX
- Infrastructure investment ‘key to growth’
- BKIC declares 30pc dividend
- StanChart profit falls 16pc in 2013