Daily Archives: July 28, 2011

Claire Jones

Credit rating agencies haven’t had a good crisis. But central bankers’ and regulators’ frequent barbs seem a touch hypocritical when one considers how much they rely on them.

Both in determining which assets are eligible as collateral for open-market operations, and the risk weights for regulations, the big-three rating agencies play a fundamental role.

In the United States, that’s set to change. Under Dodd-Frank, the US authorities must remove credit rating references and requirements from their regulations.

The Securities and Exchange Commission has now done so. And on Wednesday, the Federal Reserve’s Mark van der Weide said the central bank was examining three possible alternatives to replace the use of ratings in its risk-based capital rules. Read more

Claire Jones

A familiar consequence of crises is a flight to quality. This crisis is no exception, with gold soaring to nominal highs and the Swiss franc appreciating against pretty much every other currency on the planet.

However, owing to two decades’ worth of financial globalisation, a trend more pronounced during this crisis than any other was that this shift to safe-haven assets was coupled with a flight of capital across borders. As European Central Bank research, out on Wednesday, notes, investors were not only risk averse, but also fearful of uncertainty. And this so-called “uncertainty aversion” fed home bias.

The capital flight threatened financial stability and hindered economic growth. So what to do? For the ECB, there are two things: better analysis and more regulation.  Read more