UK watchdog defends credit rating agencies

By Jane Baird

LONDON (Reuters) - A senior UK financial watchdog defended the credit rating agencies on Wednesday but also supported current regulatory reviews of their objectivity and performance in the wake of the credit crisis.

"Credit rating agencies have been subject to much criticism," said Thomas Huertas, acting managing director of wholesale and institutional markets at the Financial Services Authority, at the Reuters Finance Summit.

"But for things that have been rated triple-A, even in the subprime mortgage space, there has been no significant default as yet to my knowledge," he said. "There is a possibility they could get rated from triple-A to double-A, but that is what ratings have always done."

The criticism has arisen as the agencies have announced hundreds of ratings downgrades of credit securities backed by U.S. subprime mortgages as defaults have risen.

Brian McManus, managing director of Wachovia Securities, had told other investors at the Opal European CDO Summit last month, "The problem is how the rating agencies compete, which tends to favor lower credit standards, high ratings and stable ratings."

The agencies are paid by sellers of securities to provide ratings, not by investors in those securities.

"I'm an advocate of the free market but if you are a criminal, you can't pick your police force," McManus said.

Even so, he did not advocate greater regulatory interference, which he said "would just make things worse".

ONGOING REVIEW

Huertas said the FSA supports and is involved in the continuing review of the rating agencies by the International Organization of Securities Commissions (IOSCO).

Part of the review process "is to ensure that the ratings agencies have a sufficient standard of objectivity and that the ratings do conform to the default experience of the securities," he said, adding that "the current episode is giving us a rich seam of new data".

The rating agencies themselves are also going through a period of self-review and are taking steps to spell out to investors what a rating does and does not do, he said.

"What ratings do is provide an estimate of the probability of default at some future date. Ratings do not say anything about the market liquidity of an instrument. Nor do ratings say anything about the price volatility of an instrument," he said.

Some rating agencies are also discussing the possibility of developing additional measurements to address market liquidity.

Huertas declined to give an opinion on whether this supplemental rating information would be a good idea.  Continued...