Finance: Credit Rating Agencies

Lord Forsyth of Drumlean Excerpts

Wednesday 14th March 2012 Lords Chamber

[Lord Sassoon]

The noble Lord, Lord Giddens, has gone absolutely to the heart of the matter. Certainly your Lordships’ Committee, the Government and most commentators would like to see competition introduced, but that is extremely difficult, as the noble Lord knows. It is a highly concentrated industry and entry is difficult because it takes time to build up a track record. A number of steps need to be taken. As I have already said, the hardwiring of credit ratings needs to be taken out wherever possible from investor mandates and from legislation and regulation in many countries.

We need to improve the transparency and comparability of the ratings of the agencies and generally lower the regulatory barriers to entry. I believe that Europe has taken some steps, but it needs to take more. For example, under the new registration processes, 16 credit rating agencies are already registered in Europe and another 15 more have applied to be registered, so there are a lot more out there already than the three that get all the focus. As to rotation, it is actually part of one of the two rounds of European directives that have come in since the financial crisis that analysts need to be rotated within firms, which is probably the proportionate response.

[Lord Forsyth of Drumlean]

My Lords, will my noble friend indicate what view he thinks the credit agencies will take of the Government’s proposal to issue 100-year bonds. If these bonds are bought by the Bank of England as part of a quantitative easing process, what will be done to avoid the problem of the value of the bonds falling as interest rates rise and being eliminated by inflation over that period of time?

[Lord Sassoon]

My Lords, my noble friend conflates a number of interesting questions. The key point is that the UK is in a very strong position to look at ultra-long or perpetual bonds. We have historically very low rates of interest and significant investor demand, particularly from the domestic funds, for very long-dated gilts. In response to that situation, we think that it is right to consult the market, as my right honourable friend the Chancellor of the Exchequer has indicated we will do, and to see what it has to say, but we will not make any issue unless it represents good value for the taxpayer.