The FSA and the Bank of England should ensure their warnings about under-priced risk and potential liquidity problems are property acknowledged, says the Treasury Select Committee.
The Committee’s latest report on financial stability has also warned credit rating agencies they face tighter regulation if they do not deal with problems in their business model.
The report, published today, says the new 'originate and distribute model of banking' has merits, as it disperses risk through the financial system and increases the efficiency of the market.
However, the Committee says the financial turbulence of mid-2007 has exposed weaknesses in the financial structure and, while it is unlikely the new banking model will be reversed, lessons must be learned from events since the summer of 2007.
The report suggests the Tripartite Authorities should clarify their definition of ‘financial stability’ to allow stakeholders to better assess possible risks to the financial system.
The committee also says the Bank of England and FSA should do more to enforce warnings about risk that are sent out to firms.
The report says: “We do not believe public authorities should be prescriptive in how financial institutions must react to such warnings.
"However, given the strong public interest in avoiding banking crises, there is a strong case for establishing a mechanism by which receipt of warnings from public authorities would be formally acknowledged by financial institutions.”
Concerns have also been raised about conflicts of interest seen within the credit rating agencies business model.
“These conflicts of interest have undermined investor as well as public confidence in the rating agencies and must be tackled as a matter of urgency. Without reform the credit rating agencies will be unable to regain public trust and confidence.
“It is therefore incumbent upon the ratings agencies as a matter of urgency to demonstrate that they can effectively manage and be seen openly and transparently to manage the conflicts of interest in their business model out of the system.”
The report warns that if the agencies do not manage to remove the conflicts of interest by themselves, new regulation will be seriously considered.
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