Examination of Witnesses (Questions 1140
TUESDAY 13 NOVEMBER 2007
Q1140 Chairman: What about Europe
when you look at the Bank of England?
Mr Drevon: With respect to the
last point, yes, I think we agree that it is quite possible that
some investors took the rating as a proxy for the risks. We do
not disagree with that.
Q1141 Chairman: Fitch?
Mr Taylor: I agree. It is a valid
Q1142 Chairman: The Bank of England
has some suggestions for improvement in the Financial Stability
Report, saying that it is in the rating agencies' best interests
that investors have a good understanding of what ratings mean,
and to that end, for example, agencies could publish expected
loss distributions of structured products to illustrate the tail
risks round them. Would you agree that is worth taking up?
Mr Drevon: I think it is something
that we would be ready to provide and we do provide in some cases.
The problem is that the market also is looking for simple messages.
If we start providing complex answers, very statistically based,
I am not sure it will necessarily respond to the investor needs.
Q1143 Chairman: Okay. The second
one: agencies could provide a summary of information provided
by originators of structured products. Information on the extent
of originators' and arrangers' retained economic interest in a
product's performance could also be included, and that may satisfy
investors that incentives were well aligned or encourage investors
to perform more thorough risk assessments. Do you agree with that?
Mr Taylor: I think it is a call
for the originator of the transaction, as opposed to us. What
information is sent out to the market is really a function of
the person originating that transaction. It is a confidential
information issue again. We would be happy to see it.
Q1144 Chairman: Agencies could provide
explicit probability ranges for their scores on probability of
default, and that would provide a measure of the uncertainty surrounding
Mr Bell: It is an interesting
idea. I think the problem is that, expressing an opinion about
the future likelihood of default, if you try to encapsulate it
in a two decimal point percentage, it is probably providing spurious
Q1145 Chairman: Agencies could adopt
the same scoring definitions. Converging in a single measure would
reduce the risk of misinterpretation by investors.
Mr Bell: We take the view that
there is benefit in having different agencies trying to encapsulate
different kind of risks because it provides a greater spectrum.
Q1146 Chairman: So you do not agree
with a single scoring?
Mr Bell: No.
Q1147 Chairman: You do not agree?
Mr Bell: We do not think that
it will help investors.
Q1148 Chairman: Rating agencies could
score instruments on dimensions other than credit risk. Possible
additional categories include market liquidity, rating stability
over time or certainty with a rating that is made?
Mr Drevon: Possibly. We are looking
into that. We are not sure if everything is feasible.
Chairman: Those are suggestions from
the Bank of England and I would suggest, given that they are from
the Bank of England, the rating agencies should take this seriously
and maybe, rather than set up a working party, come back with
your views to this Committee on these suggestions from the Bank
of England, and we will let you do that, so that we have that
information in public as a result of your submission. That is
all. Thank you for your evidence this morning.