Ms BERÈS (PSE, FR) noted that rating agencies had been used by some as scapegoats for the current crisis. She disagreed, as they could only furnish the results for which they had been mandated. But she also stated that the role of the rating of a structured financial product was different from that of the rating of a debt. She described the question of a conflict of interests as an important element and raised the question of a code of conduct. She concluded by asking the other speakers what they expected from the legislator.

Mr DREVON, Moody's, stressed the importance of cooperation and of a careful analysis of the crisis in order to restore confidence in ratings. He explained the conclusions of a process of analysis carried out by Moody's, which had led to numerous commentaries on the crisis. He explained that the roots of the crisis that had been identified were entrenched very deeply in the existing structures. Among other reasons, he noted a reduced risk transparency and a common misapprehension of the concept of liquidity. He stated that there was a misperception in some sectors that rating agencies did some sort of consulting. Some sectors also misunderstood the value of a rating as a tool. But he also promised that Moody's would take steps to improve its work.

In this context, he mentioned three specific areas: Firstly, he did not believe that the meaning of rating should be changed, or that a separate scale for structured finance should be developed. Instead, he proposed developing additional tools to explore risks beyond rating risks. He was more critical of the possibility of assessing liquidity. Secondly, he declared that Moody's supported greater clarity as to what rating agencies could and could not do. Thirdly, he expressed the view that it was necessary to work with markets and regulation bodies to create incentives to provide more transparency.

Ms RIDPATH, Standard & Poor's, stressed the limited role of rating, that is, to provide an opinion on the probability of a failure, but not a recommendation. She pointed out that it did not address liquidity, and that it was only one of many factors that an investor should consider. Some investors did not understand that rating agencies only covered credit risks. Therefore, in her opinion people had to understand what rating agencies were and what they were not. She thought access to information was critical. She stressed the great historical success of ratings, but admitted that some lessons had been learned from recent events. She mentioned an increased frequency of reviews, and modified analytic models. She stated that in history, lessons had always been learned from market experience, and that analytic models had always evolved. She would listen carefully to the market's views.

Mr KULLIG, Verband deutscher Pfandbriefbanken, explained that his organisation represented banks that issued Pfandbriefe (German covered bonds) and mortgage-backed securities. He detailed the difference between Pfandbrief and mortgage-backed security and stated that for Pfandbriefe, there were specific rating instruments, but increasingly structured finance-models were applied. However, there was no specific, permanent control for structured finance, rating agencies being the only external control. He stated that in Europe, there were only three major agencies Fitch, Moody's and Standard & Poor's, which constituted an oligopoly, almost a monopoly. The shutdown of DBRS Europe proved how difficult it was to enter the rating market. But he did not see a conflict of interest, because there was little competition and credibility was the most important asset of a rating agency.

In his view, close contact and cooperation were not problematic, but necessary. He thought that the latest developments showed that quantitative aspects were attributed too large a role, while qualitative aspects were neglected. He raised the problem that fees for ratings of complex products were higher than for ratings of simple products, which led to rating agencies being interested in the development of complex products. Concerning transparency, he stated that cooperation had been improved and that before the application of new models, consultations were carried out.

He admitted that the importance of ratings had increased during the last years, noting that also the legislator had contributed to this by resorting to ratings. He called for a reconsideration of this development, because even rating agencies repeatedly stressed that they only gave an opinion. He concluded that many things were to be criticised, but that external rating was indispensable for capital markets. Finally, it was the investors and the market that decided which ratings were relied on and how they were used.

Mr JENKINSON, chairman of the Working Group of the Committee on the Global Financial System, explained that his Working Group constituted a forum for issues related to financial markets and systems. There had been a Working Group report in 2005 that highlighted the key role of rating for structured instruments. He stressed that a one dimension rating was not an adequate instrument to reflect the risk of these instruments, and that this risk might not have been grasped by some investors.

He concluded that a worst-case scenario was possible, and that ongoing central bank monitoring was necessary. He went on to say that, after the dynamic growth of the markets and the development of more complex instruments, the Working Group was reviewing the 2005 report and looking at steps to improve market functioning and at ways of highlighting volatility. He announced the new report for March, to be part of the April general report. As for current issues, he noted the question of whether there should be additional health warnings or lower ratings on new instruments without track records. Furthermore, he mentioned the highlighting of different risk characteristics and cliff effects or large movements when ratings change.

Ms BERÈS called it paradoxical that the legislator had asked at the Commission if it was necessary to legislate and the Commission had answered that it was better to leave this to auto-regulation, but later on the Commissioner responsible had pointed to the rating agencies as the bad guys.

Mr WYMEERSCH, (CESR), stressed the importance of the subject as a central piece of the non-equity market. He thought that everything had been relying on ratings, as if they were quality signs and not only rating the risk of a fault. He accused he markets of having been willing to be misled, and of having failed to ask themselves what a rating was. More fundamentally, in his opinion many market participants had been very imprudent. He explained that only Goldman Sachs had escaped because they had made a good assessment of the market evolutions and had moved out.

For him, the risk had already been clearly flagged in the second half of the last year, and only herd instinct and greed had led to the present situation. He stated that there was a lot of cooperation between the relevant authorities. He did not blame the credit rating agencies, but saw the need for them to adapt their procedures. He acknowledged that they were willing to adapt and cooperate. He explained that the CESR had issued a report on the issue that concluded that there was no need to regulate, but that it was sufficient to rely on IOSCO. Now a new report on the results of IOSCO implementation was being worked on. In this context, it was too early to answer the question of self-regulation or government regulation.

Mr MITCHELL (EPP, IE) noted that structured finance ratings were the fastest growing sector for rating agencies, and generated a large part of their revenues. He said that Fitch drew more than 50% of its turnover from structured finance. He wondered whether this led to a conflict of interests, adding that these instruments contained the subprime mortgage bonds which had led to the crisis.

Ms BOWLES (ALDE, UK) observed that even though rating agencies' methods were in the public domain, there were still some specific ingredients that were not public. She proposed publishing these as well. She wondered whether hybrid funding was possible, with part of the funding coming from the investors' side.

Mr EVANS (EPP, UK) stated that Northern Rock was the most famous victim of the crisis. He added that the Governor of the Bank of England had stated before a Parliamentary Committee that Northern Rock could not be saved because of the 2005 Market Abuse Directive. The Commission had denied this. He asked Mr Jenkinson to comment on this.

Mr HOPPENSTEDT (EPP, DE) asked if macroeconomic facts would be taken into account for the rating.

Ms KAUPPI (EPP, FI) asked the rating agencies what lessons they had learned. She wanted to know if the complexity of products could be limited and if the claim that there was not enough transparency was true.

Ms STARKEVIČIŪTE (ALDE, LV) asked what lessons had been learned from the Asia crisis and what had been changed. She raised the problem that much information could be found on the Internet but there was often not enough experience, mentioning that the responsible person for her home country had worked before in Latin America, but that the same rules could not be applied to an East European country which was catching up.

Ms BOWLES wanted to know why, if ratings did only assess credit risk, some of them had suddenly changed.

Mr DREVON reacted to the issue of a conflict of interests by saying that it was possible, but that the alternative of payment by investors was not viable because it would lead to an inequality of information between investors. Concerning transparency, he expressed the opinion that during the good times, investors had not devoted sufficient time to understanding the information available. Regarding the lessons to be learned, he stated that Moody's was working on different levels. Firstly, he mentioned the will to improve information exchange and dialogue. Furthermore, he saw the need to strengthen the credit policy function, by improving the existing framework. Finally, he announced the development of additional tools beyond credit risk. He said that it was not possible to focus on liquidity. To explain the movements in terms of liquidity in structured finance products, he explained that structured finance, compared to the corporate world, was a series of small transactions, therefore the reaction to changes could be very rapid. Additionally, it was historically a less liquid instrument compared to corporate bonds.

Ms RIDPATH commented on possible conflicts of interest by saying that the 2005 report had looked explicitly at this issue and had found none. Also the Singapore monetary authority had confirmed this. She added that it was the responsibility of investors to understand the ratings they were using. She recalled the standardisation of products by the market and that, of seven different instruments, only two had been maintained because they were considered to be most effective. She affirmed that Standard & Poor's looked also at global elements. She explained that rating agencies had only been widely known and understood outside the US in the 1980s. They had become much more newsworthy once they had begun to work globally. She admitted that they had learned lessons, mentioning that since the Asia crisis they had looked more closely at flows, and after Enron they had looked more closely at the information available.

Mr KULLIG repeated that he did not see a conflict of interests. He doubted the usefulness of legal requirements, because this implied that the legislator had a better knowledge than the rating agency. Concerning transparency, he considered it sufficient that the methodologies were published. Within this framework, individual aspects also had to be taken into account, which meant that a black box remained. Concerning standardisation and complexity, he stated that the market was regulating this itself, mentioning the reluctance of investors, which meant a crisis of confidence for complex structures even with AAA ratings. For him, the most important aspect was the question of whether the agencies were concerning themselves with the markets behind the methodologies. He agreed with the impression that agencies were too fixated on quantitative methods and did not take into account aspects behind them. He also was critical of the idea that rating agencies should rate liquidity, noting that there was not even unanimity about the definition of liquidity. He was opposed to mixing things up and warned against assigning rating agencies even more importance than they already had.

Mr JENKINSON replied to Mr Evans that he stood by his Governor of that time. Concerning macro-analysis, he considered it important to improve the forward-looking element of ratings. He also stressed the importance of thinking about how that information could be improved.

Ms BERÈS reacted to Mr JENKINSON by saying that UK representatives had brought about changes to the Directive so that this could not happen, so they could not play both games now.

Mr WYMEERSCH stated that many investors did not have a very elaborate risk assessment. Concerning the basic data, he was not sure whether the rating agencies had a very in-depth view of the data on which they were basing their ratings. He expressed the opinion that this was not always verified. He called for more information, possibly even a prospectus for instruments that are not tradable, but on continuous basis.