Europe

EU Gets Tough on Credit-Rating Agencies


Credit-rating agencies operating in the European Union are to be subject to greater oversight in the future under radical new rules agreed by MEPs in Strasbourg on Thursday (23 April).

Under the new legislation, which was steered through the European parliament by French centre-right MEP Jean-Paul Gauzes and backed by a large majority of parliamentarians, credit-rating agencies will soon face mandatory registration and greater supervision.

Debating the document a day earlier with other MEPs, Mr Gauzes said the compromise text agreed with member states was "exemplary legislation" that "could be the basis for an international agreement."

Internal market commissioner Charlie McCreevy reacted to the vote by saying: "We expect the conduct of the credit rating agencies to be significantly improved as a result of this regulation, with clear benefits to the integrity and stability of the financial markets."

Credit-rating agencies have been soundly criticised since the financial crisis escalated last year for failing to warn investors about the risky nature of sub-prime mortgage securities and other financial products.

European investors, in part lured in by top credit ratings, bought heavily into the complicated products, only to see their value plummet as the inability of US homeowners to meet mortgage repayments became apparent.

However, the power wielded by credit rating agencies in influencing financial markets can also dramatically affect national governments.

Rating downgrades handed out to Portugal, Spain, Greece and Ireland in recent months as a result of their deteriorating public finances have led to higher borrowing costs on international money markets for the four EU member states.

New measures

As a result of this influence, the new rules agreed by parliament aim to increase the transparency, independence and good governance of agencies in a bid to improve the quality of their ratings and restore consumer trust.

Credit rating agencies will now be forced to register with the Committee of European Securities and Regulators (CESR) and undergo greater oversight by national supervisors.

The plans also contain a rotation mechanism for senior officials who approve credit ratings, in a bid to promote greater independence and prevent the build-up of excessively cosy relationships with the financial sector.

In addition, ratings produced by agencies outside the EU will need to be endorsed by a new EU agency to be set up under the law and the publication of the methodologies used by the agencies will be made obligatory.

Finance ministers are set to formally adopt the bill at a meeting in Brussels next month.

Standard and Poor's (MHP), Moody's Investors Service (MCO) and Fitch Ratings (LBCP.PA) – the main players in the sector - will all be affected by the new rules that come into effect in 2010, as will other agencies operating within the EU.

In a statement released after the decision, S&P said: "We are examining the detail of the regulation and looks forward to discussing its practical implementation with securities regulators."

De Larosiere report

In other debates on financial regulation on Thursday, Jacques de Larosiere discussed the details of the report named after him with members of the European parliament's economic and monetary affairs committee.

The report – requested by European Commission President Jose Manuel Barroso last year and published in February – calls for the powers of the EU's supervisory committees on banking, insurance and securities to be beefed up.

The former governor of the Bank of France told committee members that if the three committees were not given the power to make binding decisions, "We will have done nothing at all."

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