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OTTAWA—Credit rating agencies (CRAs) must be independent in order to be effective, says a new report released today by the Canadian Centre for Policy Alternatives (CCPA).
The report, by Doug Peters and Arthur Donner, is critical of the role CRAs played in the current financial crisis. They suggest that if a new Canada Securities Commission is instituted it should provide for an independent credit ratings system.
“The problem with our current bond and money market rating system is that the agencies are paid by the corporations they are rating,” says Peters, the former Chief Economist of the Toronto-Dominion Bank. “This raises distinct questions of conflict of interest that might inhibit them from providing accurate and honest ratings.”
The report points to the strong ratings that were given to sub-prime mortgage securities in the U.S. as well as non-bank asset-backed commercial paper here in Canada as evidence of the flaws in the current system.
“We would prefer a marketplace with multiple credit rating firm options,” says Donner, an economic consultant. “Either investors should pay for the ratings themselves, or, if public ratings are deemed essential, they should be publicly provided.”
The report recommends an independent system where ratings are provided and financed as a public good and outlines how such a system might work.
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