ratings. they are therefore more dependent on rating agencies. in addition, investors ’ trust in the rating process may have been encouraged by the regulatory and prudential system, which uses ratings as a basis for steering the investment strategies and decisions of the institutions in charge of collecting public savings. the second source of misunderstanding stems from the metric used for rating structured products. it is identical, in terms of presentation, to that used for traditional bond products. yet, the two universes are different. the consequences of assigning a aaa rating to a cdo and to a corporate bond are not the same. the risk profile is different. the potential volatility of a aaa rating for a structured product, in particular, is far greater than that for a traditional product ( for a shock, all other things are equal, of the same magnitude ). structured products are built on correlations and leverage. if one of the riskier tranches is affected by a default, the value ( and the rating ) of the other tranches will also be affected by contagion, through the decrease in their subordination level. of all asset classes, cdos are those whose rating is the least stable over time. to give just one extreme example, a aaa - rated cpdo was recently downgraded by nine notches in one day. for investors, a aaa rating has traditionally been associated with a stable investment. it is now evident that there are stable aaas and less stable aaas, which considerably reduces the clarity of ratings. it would have been simpler to adopt a specific metric for structured products and, by doing so, many misunderstandings that were responsible for the current turmoil could have been avoided. avenues for the future hopefully these thoughts will open up some avenues for the future. i believe that there are two symmetrical pitfalls to be avoided. the first would be to continue as before, with a few minor changes to the existing system. the turmoil observed over the past three months, and its potential impact on the real economy, are too important. furthermore, the rating process will inevitably play a key role in the implementation of basel ii. this will involve a more refined assessment of risk, in particular through the promotion of internal models, and greater use of external ratings. the second mistake would be to rush into the regulation of rating agencies. we cannot rule out that, at some stage, such regulation may become necessary. after all, information is a public good and rating agencies are the providers of

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 - ameriques, 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 - ameriques 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 ). but more importantly, gathering and processing this information is costly. there is no incentive for the various investors to incur these costs if they believe that others will do it and thus ensure the efficiency of the market. when banks are engaged in financial intermediation, they gather and process the information concerning their borrowers through their customer relations. bank intermediation is therefore a means of overcoming the problems of the asymmetry of information and its accessibility. however, on a securitised market, where borrowers are directly in contact with lenders, this solution does not exist. the rating system is an answer to the problem, as it enables all players to have access to simple, clear and concise information on the credit risk attached to the various classes and categories of financial instruments. the rating activity has expanded in parallel with that of bond markets. all major issuers are now rated by one or more rating agencies. for them it is a sine qua non condition for widening their investor base. the rating system goes hand in hand with the development