The three main agencies, Standard & Poor’s, Fitch Ratings and Moody’s, were asked why they did not raise questions over the way Northern Rock was funding its massive expansion in lending and why they failed to downgrade its rating until September.
It was also claimed that the fact the lenders paid for their own ratings created a conflict of interest which meant it was against the agencies’ interests to downgrade companies when they got into trouble.
Michael Fallon, a Conservative Party member of the committee, said: “You are the people who are supposed to be flashing out the warnings about the likelihood of banks getting into trouble, and then you come here and tell us you are being paid by the very same banks.”
Committee chairman, John McFall, added: “I think we have found out from the evidence of the session that you have really failed hopelessly.”
However, the rating agencies believed that there was not enough transparency in the system and that this was blocking them from making a true risk assessment.
Fitch Ratings, in a written statement, said: ‘Financial transparency has not kept up with the pace of market growth and innovation. Current disclosure potentially obscures an institution’s intrinsic risk profile.’
Mark Sismey-Durrant, chief executive of Heritable Bank, commented: “It’s very difficult for the agencies. It’s not their job to second guess what might happen, but assess how they see the situation. Ratings agencies shouldn’t be the first people to spot problems. It should be the management.”
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