Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 1140 - 1148)

TUESDAY 13 NOVEMBER 2007

MR PAUL TAYLOR, MR CHARLES PRESCOTT, MR MICHEL MADELAIN, MR FRÉDÉRIC DREVON, MR IAN BELL AND MR BARRY HANCOCK

  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 point.

  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 their ratings.

  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 scientific fact.

  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.





 
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