HPI says IMF right on tough rating agency controls

Sarah Davidson

October 13, 2010

This follows the IMF’s half-yearly Financial Stability Report, which called for transparent methods and no conflicts of interest.

Rating agencies are financed by firms that arrange and sell debt to investors, a model which has been widely criticized for creating conflicts of interest.

Rating agencies can also have a significant influence on macroeconomic stability and sentiment due to the profound impact their ratings can have on funding costs for Sovereigns, debt issuers and for fund managers thinking on which bonds to hold.

Despite this, the role and output of rating agencies remain insufficiently clear in the wake of the financial crisis.

And Hatfield Philips warns that failure to clarify and address the role of rating agencies could create a detrimental effect on the industry’s recovery and integrity. With regulation apparently taking different directions on both sides of the Atlantic there is concern that the market will continue to face uncertainty about what is required for new Issuance to return.

Stewart Hotston, director, Hatfield Philips, said: “Despite the criticism faced by the rating agencies, they remain important sources of analysis and information. Acknowledging their crucial role within the financial services industry also means ensuring they are appropriately regulated. Only with the right regulation and business models can trust in the Structured Finance market be rebuilt.”

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