Investors should accept responsibility for understanding and managing the credit risk in their portfolios, said David Longworth, the Bank of Canada’s deputy governor on Thursday.
In a speech at the Global Investment Conference in Lake Louise, Alta.—sponsored by Benefits Canada sister publication, Canadian Investment Review—he said markets work best when relevant information is available to all.
“One result of the recent turmoil is that concerns have been raised regarding the transparency of complex financial instruments and the role of the information supplied by credit-rating agencies,” said Longworth.
In Canada, issues over the transparency of instruments have been most pronounced with respect to asset-backed commercial paper (ABCP), particularly the non-bank-sponsored ABCP covered by the Montreal Accord.
“There has already been some movement towards greater transparency in the bank-sponsored segments of this market,” Longworth added. “But greater transparency of financial instruments isn’t enough—investors also need to know how to interpret the information.”
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Although credit-rating agencies have helped with interpretation in the past, he said they have recently come under scrutiny for their role in the financial market turbulence. Still, the agencies have a big incentive to improve the information content of their ratings for complex financial instruments because they rely on their reputations.
“They have shown an ability and willingness to learn from their mistakes, and they are regularly refining their rating processes,” Longworth said. “This does not mean, though, that investors can rely exclusively on the judgment of others.”
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