Finance & Business World

Banks should reduce their dependence on external credit-rating companies and improve their own risk assessment procedures, the Bank of England said in its Financial Stability Report today.

Relying on rating firms can cause lenders to hold insufficient capital, or cushions against losses, if their “methodologies and models fail to reflect credit risk accurately,” the central bank said. Twenty-one percent of respondents to a Bank of England survey in May cited a lack of confidence in the firms, up from 18 percent in July last year, the report said.

“A reduction in the use of external ratings in regulatory rules would encourage” banks “to improve their own due diligence and risk models,” the Bank of England said in the report pay day loans.

Rating agencies such as New York-based Moody’s Investors Service and Standard & Poor’s were blamed for failing to alert investors about the dangers of riskier assets, including U.S. subprime mortgages, in the deepest financial crisis since the Great Depression. European Union governments and the European Parliament approved a law that imposes oversight of rating companies in April.

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