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Rating agencies to consider providing separate rating for liquidity risk in wake of Northern Rock

Rating agencies have confirmed they are looking into whether they will provide a separate rating or tool for liquidity risk, after a grilling from the Treasury Select Committee today.

Senior Fitch managers confirmed it is setting up a working party to look at the issue while both Standard & Poor and Moody’s also said they would be considering the argument.

But questions were raised on how feasible this would be in practice.

TSC chairman John McFall accused the rating agencies of failing to make it very clear to investors that their ratings should not be seen as a green light to ‘buy’ the rated securities.

Senior managers frm Standard & Poor’s, Moody’s and Fitch Rating were all present at the TSC meeting to answer concerns over the rating agencies role in the credit crunch and the Northern Rock crisis.

Each of the rating agencies told the TSC that their ratings only relate to default risk or expected loss.

Moody’s executive vice-president Michel Madelain said it felt that it had made it very clear what its ratings meant.

But after questioning by McFall, Standard & Poor managing director and head of european structured finance Ian Bell admitted that some investors might have viewed its ratings as a green light to invest.

S&P managing director and head of european corporate and government services Barry Hancock added that it was aware of concerns that investors did not fully understand rating systems and that it was trying to make investors fully aware.

But McFall dismissed the comments saying that the evidence of this session showed that the rating agencies had failed hopelessly.

TSC sub-committee chairman Michael Fallon spent time questioning the three firms on why none of them had flagged up Northern Rock’s problems before it was hit by its funding problems.

Fallon hit out at the firms saying that they had all ultimately failed in their job of highlighting Northern Rock’s risk.

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