Regulator calls for controls on credit ratings agencies
The chairman of UK’s financial services regulator, the Financial Services Authority (FSA), has put his weight behind European efforts to regulate credit ratings agencies.
Lord Turner wants regulations to limit inappropriate use of rating techniques and conflicts of interest.
In a report reviewing the events that led to the present financial crisis, he says the credit rating- based system played an important role in the origins of the crisis.
“The growth of the credit derivatives market created the possibility that the use of credit ratings in counterparty collateral arrangements would produce a strongly pro-cyclical effect,” he said.
“This danger crystallised in the case of AIG in September 2008, where a threatened rating agency downgrade led to severe liquidity strain.”
Lord Turner’s report calls for registration and supervision of ratings agencies to ensure that credit ratings are only applied to securities for which a consistent rating is possible.
The report notes that European Union legislation on ratings agency registration, the aims of which the FSA supports, is likely to come into force later this year.
Lord Turner wants regulations to limit inappropriate use of rating techniques and conflicts of interest.
In a report reviewing the events that led to the present financial crisis, he says the credit rating- based system played an important role in the origins of the crisis.
“The growth of the credit derivatives market created the possibility that the use of credit ratings in counterparty collateral arrangements would produce a strongly pro-cyclical effect,” he said.
“This danger crystallised in the case of AIG in September 2008, where a threatened rating agency downgrade led to severe liquidity strain.”
Lord Turner’s report calls for registration and supervision of ratings agencies to ensure that credit ratings are only applied to securities for which a consistent rating is possible.
The report notes that European Union legislation on ratings agency registration, the aims of which the FSA supports, is likely to come into force later this year.