Monday, 29 October 2012

'Rating agencies favour their clients', says ECB paper

Conflicts of interest in the securities business
FRANKFURT A working paper published recently by the European Central Bank says that credit ratings agencies assigned more positive ratings to institutions more likely to bring further business. The findings were based on the period between 1990 and 2011. Evidence was presented by the authors that banks using the same rating agency to rate their asset-backed securities were significantly more likely to receive a better credit rating. The paper states that there is 'clear evidence that there are conflicts of interest in the securitisation business (which) compromised the quality of bank credit ratings.' Among other things, the paper also says that there was a bias in favour of size, whereby large banks receive 'receive more favourable credit ratings relative to their expected default risk.' This has a negative effect on interbank competition. (See also Who owns the ratings agencies? and Full ECB paper)

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