State rating agency risks 'moral hazard'
Monday 28 March 2011 - by Nicola York
The Bank of England says a public rating agency is not the answer to the issues in the credit rating agency market, saying it could create "moral hazard'.
The paper rules out abolishing CRAs altogether, saying that other entities would emerge with their own ratings.
It says that reversing this "hardwiring" of reliance on CRAs is challenging but that recent US legislation and the Financial Stability Board principles are "an important first step".
It adds: "Recent enhancements to regulation of CRAs, and steps to improve their governance, transparency and accountability should help to manage any adverse consequences of the influence CRAs have. But there may be a case for structural reform - at least in the structured finance segment of the market - to tackle conflicts of interest."
Other structural reforms discussed in the paper include an investor-pays model or a ratings clearinghouse.
There have been calls from MEPs recently to create an independent European credit rating agency in an attempt to boost competition.
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