After months of debate, the European Parliament's
comprehensive regulation on credit rating agencies (CRAs) and
their rating activities is about to come into force. It is hard
to see how it will correct the errors that contributed to this
financial crisis, or restore investor confidence.
Lord Turner in his review of the UK and international
approach to the way banks are regulated, concluded that there
has been a breakdown in rating effectiveness due to, amongst
other things, misplaced confidence in the ability of
mathematical modelling and ratings being extended to
instruments where there is limited historical experience.
Commentators have concluded that CRAs simply did not understand
the complexity of the structured finance products they rated
or, at the very least, that the assumptions on which their
rating methodologies were based were incorrect. CRAs themselves
have accepted that there had been an over-reliance on ratings.
Ratings are meant to indicate the...