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BoE to ignore rating firms

THE Bank of England will ignore the judgement of ratings agencies if its own independent view suggests the risks to be substantially greater or smaller than the publicly-stated ratings would imply, the central bank says in its quarterly economic bulletin published today.

It will only accept securities of a certain quality as collateral and aims to exclude from its public facilities “any bank whose solvency or viability is seriously in question”.

Sarah Breeden and Richard Whisker of the Bank’s risk management division say in the report that the Bank “undertakes its own independent analysis of securities submitted for eligibility checking and may deem a security ineligible even if it has the publicly stated ratings”.

“Equally, in the event of a downgrade of a security below a minimum-rating criterion, the Bank may allow it to remain eligible as collateral if the Bank believes it remains of sufficient quality,” the report adds.

The Bank of England may also impose haircuts on securities posted as collateral to protect against bothmarket risk and fundamental credit risk. It says this is particularly important for less liquid securities that the Bank might have to hold for a period of time before being able to sell them. It applies additional haircuts for non-sterling securities, model-priced securities and own-name securities. Total effective haircuts applied to the loan collateral portfolios of RBS and HBOS came to 49 and 48 per cent.

It also warns that there is a risk that long-term unemployment might rise further, given the increase in the jobless rate to eight per cent and the uncertainty about the labour market.

Analysts at the Bank’s Monetary Assessment and Strategy Division warn: “a more prolonged period of above-target inflation could increase the risk that inflation expectations rise”. Long-term expectations have remained well-anchored but near-term predictions have risen sharply.