Bank of Canada Discusses Credit Rating Agencies

The Bank of Canada has released the December 2007 Financial System Review which includes a review of the Credit Rating Agency issue by Mark Zelmer, the Director of the Financial Risk Office.

Frankly, it’s a bit wishy-washy, but does summarize the various issues in a well-structured manner. Mr. Zelmer concludes:

In the end though, investors need to accept responsibility for managing credit risk in their portfolios. While complex instruments such as structured products enhance the benefits to be gained from relying on credit ratings, investors should not lose sight of the fact that one can delegate tasks but not accountability. Suggestions such as rating structured products on a different rating scale could be helpful, in that this may encourage investors to think twice before investing in such complex instruments. Nevertheless, investors still need to understand the products they invest in, so that they can critically review the credit opinions provided by the rating agencies.

4 Responses to “Bank of Canada Discusses Credit Rating Agencies”

  1. […] David Dodge used a speech at the Empire Club to plug the Financial System Review article on the credit rating agencies. He also lends a certain amount of support to calls for repeal of the credit agencies favoured position with respect to material non-public information (in the US, this means exemption from Regulation FD; I don’t know what the legal framework is in Canada): Let me touch briefly on the role of credit-rating agencies in all of this. There is an article in the current FSR that expands on the issues related to the possible reform of the credit-rating process. One thing that is clear is that in the future, credit-rating agencies will find it to their advantage to explain more clearly the rationale for, and limitations of, their ratings for highly structured products. There are some natural, self-correcting market forces at work that should lead the rating agencies to improve their processes. Indeed, those credit-rating agencies that do not work harder to improve their processes will likely have fewer clients willing to pay for their services. As I understand it, most agencies are working on such improvements. […]

  2. […] The use of a different scale has been proposed before – it was mentioned by the Bank of Canada and has been advocated elsewhere – like, f’rinstance, by Richard Portes on VoxEU as discussed on November 15. Frankly, I have difficulty understanding why it’s considered worthy of discussion. […]

  3. […] also appears to contradict the most sensible thing ever written by a Bank of Canada analyst (Mark Zelmer in the Dec ‘07 FSR): In the end though, investors need to accept responsibility for managing credit risk in their […]

  4. […] securitization suffers greatly from the absence of Mark Zelmer, who, it will be recalled, wrote the single most sensible statement during the entire crisis: In the end though, investors need to accept responsibility for managing credit risk in their […]

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