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Tussle over proposals for Europe's new rules on credit rating agencies

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New rules for credit rating agencies should clarify their working methods, boost competition and reduce reliance on their ratings, members of the European Parliament's economic and monetary affairs committee said on March 16 2011.
The debate was held two months before the European Commission is to table legislative proposals.
MEPs also advocated creating a European credit rating foundation, and called for special attention to sovereign debt ratings.
The committee's own-initiative resolution, drafted by Wolf Klinz (ALDE, DE), did not however find unanimous support.
The Socialists chose to abstain, with a view to amending the resolution before the European Parliament as a whole votes on it. The key points of discord were to do with methods for rating sovereign debt and with the structure of the proposed European credit rating foundation (ECRaF).
The resolution refrains from significantly reducing the scope for private credit rating agencies to rate sovereign debt, as had initially been advocated by the Socialists and the GUE/NGL group.
It nonetheless calls for more light to be shed on how credit rating agencies arrive at their sovereign ratings, and says they should explain their methodologies and why their ratings deviate from the forecasts of the main international financial institutions. The resolution says that ratings have tended to accentuate spreads and demands special consideration of this issue.

European Credit Rating Foundation

The other bone of contention was about what structure to propose to provide a European counterweight to the three largest credit rating agencies, which are felt to be too dominant on the European scene.
The resolution calls on the European Commission to carry out a detailed impact and viability assessment for a fully-independent credit rating foundation, with funding from the financial services industry made available for the first five years at most.
Left of centre groups would have preferred a public credit rating agency with less detail about the agency's sources of funding after the start-up period.  

Reducing dependence

The resolution advocates a series of measures to reduce current dependence on a very few sources for credit ratings.
These include increasing the use of internal credit ratings, particularly by large financial institutions with the capacity to carry out their own risk assessments, and boosting competition.
Market participants who are unable to carry out risk analyses in house should not be able to invest in structured products, or else should be able to do so only at the highest risk weighting, the resolution proposes.
To boost competition, the resolution calls on the Commission to assess possibilities for establishing a European network of credit rating agencies, which, it says, would allow smaller agencies to compete with the "big three". The resolution adds however that attention must be paid to ensuring that increased competition does not lead to reduced quality of ratings or "rating shopping".

Liability

The resolution also looks at ways to hold credit rating agencies to account for the advice that they give.  Most importantly, the committee text calls on the European Commission to identify ways in which credit rating agencies can be held liable under member states' civil law.
The resolution also suggests that all registered credtit rating agencies should assess the accuracy of their past credit ratings and make these assessments available to supervisors, and that the European Markets and Securities Authority (ESMA) should be empowered to conduct unannounced checks on these assessments.

Enhancing transparency

The resolution suggests various ways shed light on how credit rating agencies arrive at their opinions and suggests that further documentation should be provided to supervisors. 
It also asks the European Commission to look further into the benefits of requiring the use of two obligatory ratings, the more conservative of which would serve for regulatory oversight. This would give investors a clearer idea of the real situation of the investment instrument, it says.

Text: thesofiaecho.com

Photo: Reuters



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(17.03.2011)