David Ruffley MP has grilled the ratings agencies Standard & Poor's and Fitch over their ratings of the UK banking system leading up to the 2008-09 financial crisis. Faulty ratings have been cited by some analysts as a cause of the financial crisis, as banks and other financial institutions invested in products that were rated AAA but were, in reality, backed by high-risk assets. The Treasury Select Committee (TSC) is currently conducting an inquiry into ratings agencies.

In the exchange between the TSC and Fitch and Standard & Poor's, the representative from Fitch was unable to recall an assessment of the UK banking system published by his own agency.

The exchange was widely reported by, among others, the Daily Telegeraph and Daily Mail.

http://www.telegraph.co.uk/finance/debt-crisis-live/9222355/Debt-crisis-as-it-happened-April-24-2012.html

http://www.dailymail.co.uk/news/article-2134742/Scots-risk-loss-credit-rating-quit-UK-says-leading-agency.html

The transcript of the exchange is below.

Q330 Mr Ruffley: Can I just turn to Standard & Poor's and your Banking Industry Country Risk Assessment, the BICRA, methodology? Could you just take us through the basis on which you give the United Kingdom a 3, which puts us in the same category as Canada, Germany, Japan and the US?

Moritz Kraemer: I can give it a stab. I try to be constructive and helpful to the Committee. Probably the person who would be better placed to answer this would have been my colleague Dominic Crawley, who was in front of you last month. The BICRA methodology is an assessment designed to evaluate and compare on a global basis banking systems. So not individual banks within a jurisdiction, but the banking system overall. That is also true for the UK, as for all the other 84 or 85 systems that we analyse in this way.

The two main areas are the economic risk and the industry risk. The 3 score, which is the BICRA score-which is not a rating, it is a score of relative strength-is held back largely by the economic risks, which have to do with the imbalances in the UK economy, which you could measure, for example, in the leverage of private households, in particular, and therefore with a credit risk in the books of the banks. This, for example, is a theme that you see in other sovereigns as well.

If you look at the root causes for the current financial crisis, it is our view it is not a fiscal crisis per se, but it has been a crisis of too fast credit growth and credit risk in the economy. The UK is certainly one of those cases. It is our view that the UK is currently in what we would call a correction phase. Basically what you have now is banks becoming much more cautious and reluctant to extend new credit, which, of course, comes with new credit risk exposure.

Q331 Mr Ruffley: Could I just stop you there because you break down your assessment of banking risk to credit risk and you have observed in some of the evidence that there is a downside risk on commercial real estate in the United Kingdom. Would you like to amplify on that?

Moritz Kraemer: I would probably think this would have been better covered on the 7 March session because there you had the man in charge of this particular process in front of you. I can talk in general terms about the main pillars of the BICRA, which I tried to do.

Q332 Mr Ruffley: Can I just switch to Mr Wilson on the banking methodology? That is the methodology that Mr Kraemer has talked about. That is something you subscribe to as well, is it not?

Alastair Wilson: I am sorry, what is something that I subscribe to?

Mr Ruffley: BICRA.

Alastair Wilson: We have a separate banking methodology, so I am not sure-

Q333 Mr Ruffley: What is it called?

Alastair Wilson: It is called the Bank Financial Strength rating methodology.

Q334 Mr Ruffley: Fine, okay. Let me track back a bit. What were your banking ratings in 2007 before the crash? How were you rating the UK economy? How good was your outlook? What was it assessing as the systemic risk in the UK banking system?

Alastair Wilson: The UK's rating was AAA in 2007.

Q335 Mr Ruffley: Your rating was not very good as it turned out, was it?

Alastair Wilson: I am sorry. I do not understand the question.

Q336 Mr Ruffley: Are you aware there has been a financial crash in the United Kingdom? What I said to you was, what was your rating prior to that crash of the UK banking system?

Alastair Wilson: We do not have a single rating for the UK's banking system. Our methodology does not take a system and give it a rating. We only apply ratings to individual institutions, which is why I found it difficult to answer the question about the rating for the system as a whole.

Q337 Mr Ruffley: So you do not subscribe to the system, for instance, that Fitch have for a country. Mr Riley, you have a system, do you not, that rates the banking strength of a country?

David Riley: We do. There are two aspects of our system rating. One is just simply taking the standalone rating-

Q338 Mr Ruffley: Let us just talk about the country because there is a submission here that you have said that the UK budget is neutral for AAA and, under your system, you have intermediate risk assessment for the UK economy and you have an intermediate risk for the institutional framework and an intermediate risk for competitive dynamics, which is competition in the banking system, and a low risk assessment of systemic-wide funding. On the assessment that you make for the UK banking, what is that now?

David Riley: Our assessment on the UK banking-

Mr Ruffley: UK banking system. You have scored it, have you not?

David Riley: Our banking team have made the scoring on the UK banking system. That is their primary analytical responsibility and lead. We draw on some of that information to pass-

Q339 Mr Ruffley: Just so we are talking about the same thing, you break it down to institutional framework, intermediate risk assessment, competitive dynamics and system-wide funding. That is right, isn't it?

David Riley: I understand that to be correct, but I am not very-

Q340 Mr Ruffley: I am reading from Fitch Ratings 21 March 2012 where it says, "UK budget is neutral for AAA status."

David Riley: Sorry, you are switching between a comment about the UK budget and-

Q341 Mr Ruffley: Listen, can you stop talking? I ask the questions. You answer the questions. Is it the case that you put out something called, "UK budget is neutral for its AAA status", Fitch Ratings Limited 21 March. You are or are you not Fitch Ratings?

David Riley: That is correct.

Q342 Mr Ruffley: Thank you. Do you know what I am talking about?

David Riley: I do not have a copy of the document that you are referring to in front of me.

Q343 Mr Ruffley: It, at length, breaks down the fact that you give a score for the United Kingdom and you break it down for an intermediate risk on institutional framework, intermediate risk for competitive dynamics, which is the competition in the UK banking system, and low risk assessment for systemic-wide bank funding. Now, have you the faintest idea what I am talking about, because this is your own document? Do you think it is sensible coming to this Committee under-briefed and not knowing your own business's releases?

David Riley: I think that is an unfair comment.

Q344 Mr Ruffley: Do you know what I am talking about? You just said you did not know what this document was about. How is this Committee able to ask questions when you come along complacent, sometimes smirking. I want to know what your assessment is and why of the UK banking system at the moment. Now answer the question.

Chair: I think it would be helpful if you give a short reply, then I think I will be bringing in somebody else.

Mr Ruffley: No, I want to ask a question after that; a quick one.

Chair: Ask the supplementary now, David.

Mr Ruffley: I want to know what your rating is for the UK banking system, Fitch.

David Riley: I am not familiar with the document that you are referring to, so I cannot answer that question. My apologies-

Mr Ruffley: What is it?

David Riley: -for being insufficiently briefed-

Mr Ruffley: By being incompetent.

David Riley: -on the UK banking sector. I am responsible for sovereign ratings at Fitch, not for all of our banks.

Mr Ruffley: Can I ask one final question? This will be my last question?

Chair: Very briefly.

Q345 Mr Ruffley: Fitch, as an organisation, what did it rate the UK banking system in 2007?

David Riley: I am not in a position to tell you that.

Mr Ruffley: Useless, absolutely useless.

Q346 Chair: These are issues that you are not directly responsible, as I understand it.

David Riley: That is correct.

Mr Ruffley: Hopeless. All of you.