MPs have launched a sweeping attack on the Bank of England, the Financial Services Authority and credit rating agencies for failing to warn firms over their risk exposure.
In its latest Financial Stability and Transparency Report, the Treasury Committee lambasts the Bank of England and the FSA for their system of warning banks about a serious under-pricing of risk and impaired market liquidity before last summer.
In the report, committee chairman John McFall calls on both organisations to highlight the two or three most important risks, such as potential impaired liquidity in the market, in a short letter to financial institutions for discussion at board level.
He says the Bank of England and the regulator should seek confirmation from those institutions that these warnings have been considered.
He says banks and building societies should also publish a response to the Bank of England and the FSA.
He adds: “Warnings of potential problems should be beefed up.”
McFall says that investors were partly to blame for current market conditions. He claims they failed to do due diligence when they invested in complex financial structures last year, such as collaterised debt obligations, without understanding them.
He adds: “You cannot regulate against stupidity.”
The report also warns of multiple conflicts of interest in credit rating agencies’ business models and flaws in their rating methods.
McFall adds: “The credit rating agencies must tackle these perceived conflicts of interest as a matter of urgency if they are to regain the trust and confidence of market participants and the public.
“If they are unable to put their house in order, then new regulation may be the only answer.”