Are credit rating agencies Angels?

Sir, it is not clear from Frank Partnoy’s “Take away the credit rating agencies licences”, March 13 whether he is against the system of using credit rating agencies to perform the assessment of risks in lieu of the market, as I am because of the systemic risks that are introduced; or against the market of the credit rating agencies, that he describes as a locked duopoly that does not allow for the entrance of a company named Rapid Rating.


That said I would recommend the reading of Rethinking Bank Regulations, Cambridge Press 2006, where its authors James R. Barth, Gerard Caprio, Jr., and Ross Levine, explore the possibility that regulators might not be Angels and they find proof that giving more power to authorities does indeed creates dangerous distortions. In this respect we might also need to question whether we should dare to move forward evaluating risks, with the premise that the credit rating agencies are Angels.

Sent to FT, March 13, 2006