Strasbourg, 15/01/2008 (Agence Europe) - Often used as a scapegoat for the current financial turbulence, notation agencies were at the centre of the special economic and monetary affairs committee meeting at the European Parliament on Monday 14 January. During this public hearing, MEPs sought to better understand how the sector worked as it activities now extend to ever more complexly structured financial products. Notation agencies cannot be criticised for not having done what was asked of them but Pervenche Berès, the French socialist and president of the committee, immediately asked whether the way in which they work today was the best way. Questions raised by MEPs, in an attempt to learn from the current crisis, focused on: transparency; information; what to expect from the European legislator; and whether a different kind of notation is required for structured products.
Frédéric Drevon, Director at Moody's, said that the roots of the crisis are “inherent in the financial system itself” and are linked to weak risk traceability and confusion about available liquidity. He said that it was not necessary to change their service's rating or use another notation scale, but rather provide more information about these notations and develop other instruments for measuring risk that go beyond credit risk alone. He also said that they needed to acknowledge that there was a lack of information about structured market investors. Barbara Ridpath of Standard & Poor also pointed out that notation agencies' activities are not always understood very well. She explained that what was involved were questions about the probability of insolvability, and not ones of making a recommendation. Redpath said that investors had misinterpreted notations and stressed that that “access to information is absolutely critical”. She wants an increase in both the quantity and quality of information on the market.
On the side of the users of notation services, Sasha Kulling, representing the German bond issuers association (Verban deutscher Pfandbriefbanken) criticised the lack of competition, given that with S&P, Moody's and Fitch, the situation of an oligopoly can lead to payments that are too high. Close cooperation between investors and agencies is also needed, he insisted. Nigel Jenkinson, the president of the committee's working group on the global financial system (CGFS), provided a few ways for rethinking current regulation, and possible developments. Jenkinson said that a simple notation system is not enough for taking into account the complexity of financial products. He said that they could look at ways of developing indicators to highlight the sensitiveness of a specific notation, as well as a warning system for new products whose previous pedigree is unknown. Improving how the markets work and information from the agencies should help investors understand the dangers, as would improved monitoring structures. The working group's report on the role of notation for structured products is expected in March.
Eddy Wymeersch, the president of (CESR), said that it was a waste of time blaming the notation agencies. He said that they were indispensable even if “procedures have to be adapted in many areas”. A good rating did not mean a risk-free investment and, as is the case in many financial crises, the herd instinct and greed had won out. Goldman Sachs has not been hit because they had provided a correct assessment of market developments and stayed away from at-risks products while the markets in general trod an ambiguous path between solvability and liquidity. Was self-regulation now required, or regulation imposed by the public authorities? Wymeersch insisted that it was too early to say and that it was the code of conduct (IOSCO) which should be modified. The CESR is cooking up something in its April report on the application of this code and will also examine questions posed by Commissioner McCreevy on conflicts of interest and transparency.
In response to Gay-Mitchell (EPP-ED, Ireland), who raised the question of conflict of interest on Monday (agencies are paid by the bodies that are rated and not by the investors), rating agencies recognised that “conflicts of interest are possible in some cases” but none had so far been revealed. Given the methods used in the public area (available on agency websites), those using notations can increase understanding, insisted Sharon Bowles (ALDE, United Kingdom). In reply to Pia Noor Kauppi (EPP, Finland), asking about market developments, Ms Ridpath and Mr Kulling predicted a return to product simplicity in the short and medium term until the next boom. Margarita Starkevièiûte (ALDE, Lithuania) said that the real question related to the application of the same methodology to economies that were as different as those of Brazil and Lithuania. John Purvis (EPP-ED, United Kingdom) wanted to know what could be done for evaluating liquidity. (A.B.)