24 May 2008

CESR report on Market Participants Consultative Panel

The Market Participants Consultative Panel held its 16th meeting on 9 April 2008 in Paris and included discussions on the recent market turmoil and the role of rating agencies.

Presentations were given on the market turmoil and rating agencies. These concluded to avoid an overreaction in regulatory response, a need for regulators to learn more about asset price bubbles, a possible review of accounting rules and a stronger focus on stress testing. Also, regulation in the area of mortgages should be established, and the originate/distribute model for securitization should be adapted. It was also suggested to establish among regulators a think tank to better understand developments in the market.

On the role of Credit Rating Agencies one member stated that some EU-regulators seem to oversimplify the problem of understanding financial products by using ‘traffic lights’. Furthermore, concerns were expressed about cliff-effects of ratings and the selling process. Caution existed among members about authorisation of CRA’s with all liability issues attached to it for regulators. No evidence had been found to date for improper handling of conflicts of interests by CRA’s, despite extensive regulatory attention.

Another member confirmed that CRA’s are providing a useful service and regulation is not necessary. At present however, CRA’s did a poor job in product ratings, in particular with regard to the speed of adjustment of ratings. Other bottlenecks identified also include the current market structure of rating agencies, and the existing prudential leverage of CRA’s due to Basle II.

The next meetings of the Market Participants Consultative Panel:

Paris, 29 September 2008

Paris, 11 December 2008 (jointly with CESR Members)

Public statement

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