Bloomberg News

Credit Ratings Suffer From Lack of Competition, FSA Says

November 15, 2011

(Updates with report authors in sixth paragraph.)

Nov. 15 (Bloomberg) -- The price and accuracy of credit ratings would improve with greater competition among providers, the U.K.’s Financial Services Authority said in a report today.

The industry has “high fixed costs, large economies of scale, network externalities” and it has taken a long time for companies to establish their reputations, the FSA said in the report on its website. Increased competition “should ideally improve ratings accuracy.”

The European Commission proposed tougher regulations today to rein in credit-ratings companies amid concerns their assessments of government bonds may escalate the region’s sovereign-debt crisis. The draft would empower investors who lose money to sue ratings firms and includes measures to boost competition in the markets for ratings.

“Policy interventions that facilitate competition, take ratings shopping into account, and avoid imposing further barriers to entry would be desirable,” the FSA said in its report.

Global equity, bond, currency and commodity markets were roiled last week when Standard & Poor’s sent, and then corrected, an erroneous message to subscribers suggesting France’s top credit rating had been downgraded. French 10-year bond yields rose as much as 28 basis points after the mistaken announcement. S&P affirmed France’s AAA rating in a later statement.

The report was written by FSA economists Damien Fennell and Andrei Medvedev. The views expressed “are those of the authors and not those of the FSA,” according to the document.

--Editors: Peter Chapman, Christopher Scinta

To contact the reporters on this story: Ben Moshinsky in London at bmoshinsky@bloomberg.net;

To contact the editor responsible for this story: Anthony Aarons at aaarons@bloomberg.net


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