Bloomberg News

Basel’s Ingves Warns Against Relying on Ratings for Risk Models

June 01, 2012

Investors shouldn’t only look at credit ratings when assessing risk and will in future need to rely more on their own analysis, said Stefan Ingves, the head of the Basel Committee on Banking Supervision.

“When it comes to how one looks at rating agencies,” financial market participants “should at least not rely solely on external ratings without making their own considerations or judgments at all,” Ingves, who is also the governor of Sweden’s central bank, said in response to questions in Stockholm today.

Rating companies have come under scrutiny since failing to identify some of the imbalances that led to the global financial crisis. Denmark, which holds the rotating European Union presidency, said May 21 it won backing in the 27-member bloc to curtail the influence of rating companies and pledged to push for more competition in the industry. Denmark also wants to allow issuers and investors better access to suing rating companies should they fail in their job.

“If one looks back one can say that, for various reasons” rating companies “turned out to play a somewhat too big of a role,” Ingves said. “But it’s not entirely simple to find something that’s just about right if one looks into the future and therefore rating agencies won’t disappear.”

Shrugged Off

Investors in Sweden’s biggest banks shrugged off downgrades last month by Moody’s Investors Service, sending bond and share prices higher. Moody’s last week lowered Sweden’s Nordea Bank AB (NDA) and Svenska Handelsbanken AB (SHBA) to Aa3, and Norway’s DNB Bank ASA to A1, all single-level downgrades. Credit grades of SEB AB (SEBA) and Swedbank AB were affirmed while Landshypotek AB was cut two steps to Baa2. All ratings carry stable outlooks, Moody’s said.

Part of the problem is that the credit ratings industry is dominated by too few companies, Danish Business Minister Ole Sohn said on May 21. Raters themselves need to be better regulated and conflicts of interest removed, he said then.

According to Ingves, “those who make decisions in the world of banking, in the financial sector, will have to do a bigger share of the work” in assessing risk.

To contact the reporter on this story: Johan Carlstrom in Stockholm at jcarlstrom@bloomberg.net

To contact the editor responsible for this story: Tasneem Brogger at tbrogger@bloomberg.net


Ebola Rising
LIMITED-TIME OFFER SUBSCRIBE NOW
 
blog comments powered by Disqus