July 27 (Bloomberg) -- Credit-rating firms, which have weighed in on the debate over the U.S. debt ceiling, should be free from political pressure when they assess sovereign debt, Deven Sharma, the president of Standard & Poor’s, will tell lawmakers and regulators at a congressional hearing.
“In a global economy where we rate more than 120 sovereign governments, it is particularly important that rating methodologies not become subject to influence by one or more countries seeking to benefit its own rating, which would undermine the independence, comparability and value of ratings to all,” Sharma said in testimony prepared for a House Financial Services subcommittee hearing today.
Standard & Poor’s and Moody’s Investors Service are considering a downgrade of the U.S. credit rating unless President Barack Obama and Congress reach an agreement to rein in the federal debt.
At the House panel hearing, Sharma and Michael Rowan, a managing director at Moody’s, will lay out the changes their firms have made after lawmakers criticized them for contributing to the 2008 economic collapse, according to a copies of their testimony obtained by Bloomberg News.
“The debt ceiling negotiations and the long-term fiscal health of the U.S. have brought a renewed focus on the credit rating agencies,” Representative Randy Neugebauer, a Texas Republican and chairman of the subcommittee, said yesterday in a statement.
Members of the Subcommittee on Oversight and Investigations will also hear from banking regulators, who are required by last year’s Dodd-Frank Act to replace references to credit ratings in existing statutes with an “appropriate” standard for measuring creditworthiness.
The agencies are finding the new rules about credit ratings “exceptionally challenging” to implement, David Wilson, the senior U.S. deputy comptroller for bank supervision policy, said in prepared testimony.
Credit-raters, including Moody’s and McGraw-Hill Cos.’ Standard & Poor’s unit, were targeted by lawmakers after they issued top rankings to mortgage-backed securities whose collapse helped spark the financial crisis. Reports from the Financial Crisis Inquiry Commission and Senate Permanent Subcommittee on Investigations cited the failures of the credit-rating firms as a reason for the financial crisis.
Sharma and Rowan will say their companies support the removal of the ratings from statute, according to their prepared testimony.
The Securities and Exchange Commission was given most of the Dodd-Frank workload for re-writing credit-rating regulations. The regulator yesterday adopted its first rule to remove a requirement for credit ratings from rules about securities offerings. It has proposed several similar rules this year.
The SEC also issued a proposal in May to enforce changes in the credit raters’ conduct -- overhauling how the firms should assess debt securities, ensure the quality of ratings and prevent conflicts of interest.
Dodd-Frank also required the agency to conduct annual examinations of each firm registered with the SEC to issue ratings.
“Examinations will be critical to enforcing compliance with the substantial new compliance obligations,” said John Ramsay, deputy director of the SEC’s trading and markets division, in prepared testimony. He said the first cycle of inspections for the 10 firms should be completed this year. “Fulfilling this objective will, of course, place a burden on the Commission’s examination resources.”
Lawmakers may need to consider changes to the law in order to ease the implementation process, the OCC’s Wilson said.
“Precluding undue or exclusive reliance on credit ratings -- rather than imposing an absolute prohibition to their use -- would strike a more appropriate balance between the need to address the problems created by overreliance on credit ratings with the need to enact sound regulations that do not adversely affect credit availability or impede economic recovery,” Wilson said.
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