Credit rating agencies
Delivered in Plenary - 16th January 2013
Credit rating agencies have been widely blamed for their role in the financial crisis of 2008. They triple-A rated the US mortgage-backed securities, which ultimately caused the collapse of institutions such as Bear Stearns, Lehman Brothers and AIG.
This legislation now opens up competition in a notoriously uncompetitive market, where 90% of ratings are made by three companies: Moody’s, Standard and Poor’s and Fitch’s. There were accusations in the past, which seem to have been resolved now, of conflicts of interest.
However, it is debatable whether the report goes about these aims in the right way. Ruling on how often a rating agency may make judgments on sovereign debt is somewhat odd. Do we really believe that a proscriptive and rushed approach by restricting these people to a view for only three times a year is going to decrease volatility? In actual fact this may in reality increase the volatility, for example by necessitating more severe downgrades than would previously have been necessary. It is also harmful as it limits the freedom of the credit rating agencies to act on their own best judgment as to when ratings should be modified.
Overall it was a poorish report so I abstained.