Christian Noyer: Possible ways of improving the process of rating Speech by Mr Christian Noyer, Governor of the Bank of France, at the Symposium on financial ratings, organised by the Cercle France-Amériques, Paris, 12 December 2007. *  *  *  Ladies and gentlemen, It is a great pleasure and honour for me to speak at this conference organised by the Cercle France-Amériques and close the rich and lively round table discussions and the previous speeches on rating agencies and the financial crisis. In the current state of turmoil, rating agencies have attracted a large amount of criticism. My intention is not to enter into this discussion, but rather to make a few remarks on the rating process itself and the possible ways of improving it, in the light of the recent events. Preliminary remarks An essential function of financial markets is to collect and process information. This information is used to assess the risk and return on the various assets, and therefore to help price discovery and more generally to take investment and financing decisions. However, the process by which this information is factored into prices is complex. Economic agents do not all have the same access to data and processing capacities. There is therefore an asymmetry of information on the markets, which is at the root of well known market failures: adverse selection (whereby lower quality investments are more readily financed than “good” projects) and moral hazard (which encourages investors to take excessive risks).
After all, information is a  2  BIS Review 2/2008  public good and rating agencies are the providers of this good. But the case for further regulation has not as yet been compelling. First and foremost, we should consider the contents of possible improvements. I would pinpoint three areas, among others, for consideration: first, greater transparency of rating methods and the overall role of rating agencies in the securitisation process. Second, a marked difference in the metric used for rating bonds and structured products, which would restore confidence in ratings. This could be done in two ways, which could also be combined: either by adopting another rating scale for structured products (with another symbol for example); or by including an additional measure in the credit rating, in particular on its volatility in times of market or liquidity stress. Third, a specific rating for liquidity risk. I am aware that rating agencies are considering this, despite the difficulties of such an exercise. We must hope that the discussions currently underway in international fora, such as the FSF and groups of central bankers in which the Banque de France is actively involved, will restore the integrity of the ratings system, given its prominent role in the development of modern financial markets. Ladies and gentlemen, thank you very much for your attention. BIS Review 2/2008  3