Local power, no solution

Author: | Published: 1 Jul 2009

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...