Ratings firms slated in MPs’ crunch report
CREDIT ratings agencies (CRAs) should bear some of the responsibility for financial instability, the Treasury committee said yesterday, as it revealed its report on corporate governance and remuneration at financial services firms in the wake of the credit crunch.
The committee, led by Labour attack dog John McFall, said it was “deeply concerned by the conflict of interests faced by credit rating agencies and have seen little evidence of the industry tackling this problem with any sense of urgency”.
Over-reliance on credit ratings played a “key role” in the crisis, the committee concluded, pointing to evidence from Royal Bank of Scotland chief executive Stephen Hester.
In an earlier evidence session, Hester said: “One should never have assumed that a credit rating told you anything about the market value of the instrument, it was only meant to tell you about the probability of default.”
Angela Knight, the chief executive of the British Bankers’ Association (BBA) said yesterday that the MPs were right to highlight the role of CRAs.
“They operate outside the regulatory framework and certainly have potential conflicts of interest,” she said. “Downgrades can have a huge destabilising effect, so they bear a lot of responsibility.”
The committee concluded that while reliance on credit ratings may have been more common among smaller, less systemically risky investors, they had become a “convenient short-cut” for larger firms as an alternative to due diligence.
The report also highlighted the discrepancies in accounting standards between European nations, which it said posed a hindrance to global co-operation on fair valuation. “We regret the power of the European Commission to pick and choose which international accounting standards should be implemented in the EU,” the committee said.
The committee also absolved journalists of blame for exacerbating the crisis. “The press has acted responsibly when asked to show restraint in particular areas and…those responsible for creating the current crisis have sought refuge in blaming the media for their own conduct.”