But more importantly, gathering and processing this information is costly. There is no incentive for the various investors to incur these costs if they believe that others will do it and thus ensure the efficiency of the market. When banks are engaged in financial intermediation, they gather and process the information concerning their borrowers through their customer relations. Bank intermediation is therefore a means of overcoming the problems of the asymmetry of information and its accessibility. However, on a securitised market, where borrowers are directly in contact with lenders, this solution does not exist. The rating system is an answer to the problem, as it enables all players to have access to simple, clear and concise information on the credit risk attached to the various classes and categories of financial instruments. The rating activity has expanded in parallel with that of bond markets. All major issuers are now rated by one or more rating agencies. For them it is a sine qua non condition for widening their investor base. The rating system goes hand in hand with the development of large liquid, deep and international markets. It is a precondition and a tool for ensuring the smooth functioning of these markets. Securitisation, as we know it today, and which underpins national and international financial activity, would be impossible without these ratings. A further step was made with the expansion of structured products. The role of rating agencies now extends well beyond that of mere information providers.
If one of the riskier tranches is affected by a default, the value (and the rating) of the other tranches will also be affected by contagion, through the decrease in their subordination level. Of all asset classes, CDOs are those whose rating is the least stable over time. To give just one extreme example, a AAA-rated CPDO was recently downgraded by nine notches in one day. For investors, a AAA rating has traditionally been associated with a stable investment. It is now evident that there are stable AAAs and less stable AAAs, which considerably reduces the clarity of ratings. It would have been simpler to adopt a specific metric for structured products and, by doing so, many misunderstandings that were responsible for the current turmoil could have been avoided. Avenues for the future Hopefully these thoughts will open up some avenues for the future. I believe that there are two symmetrical pitfalls to be avoided. The first would be to continue as before, with a few minor changes to the existing system. The turmoil observed over the past three months, and its potential impact on the real economy, are too important. Furthermore, the rating process will inevitably play a key role in the implementation of Basel II. This will involve a more refined assessment of risk, in particular through the promotion of internal models, and greater use of external ratings. The second mistake would be to rush into the regulation of rating agencies. We cannot rule out that, at some stage, such regulation may become necessary.