We have already reported on the publication of the Turner Report here. As part of this report, the FSA Chairman, Lord Turner, considered the role that credit rating agencies played in the current financial crisis and whether they should be regulated in the future.

Lord Turner states that the current credit ratings system played a role in the origins of the crisis in three significant ways:

- credit ratings were being used as sign posts for liquidity and market price stability rather than solely for credit risk, as intended. This was apparent in the case of AIG in September 2008 where a threatened credit rating downgrade resulted in a severe strain on the company's liquidity; - ratings for structured credit were shown to be far less effective in predicting future market patterns than those ratings for single name securities. Lord Turner felt the ratings were being extended to instruments where there was limited historical experience and that the industry had a misplaced confidence in the ability of mathematical modelling to define the risk; and - there was a fear that credit rating agencies had allowed commercial objectives to cloud their judgement when deciding whether the instruments were capable of being rated effectively.

In the report, Lord Turner advocated that regulatory responses could address these problems to some extent. He agreed that the proposals for the regulation of credit rating agencies and the subsequent supervision by the FSA would be suitable. However, credit rating agencies themselves would need to play an active role in stressing that the rating related to credit only and has no reflection on an instrument's liquidity and price.

A full copy of the Turner Report can be accessed here.