Economic and monetary affairs
More transparency, increased competition, the creation of a European credit rating foundation, and a reduced dependence on credit ratings are some of the main calls to come out of a resolution adopted on Wednesday. The resolution also asks for special attention to be given to sovereign debt ratings.
A couple of months before much anticipated fresh Commission proposals on further regulating credit rating agencies, the EP economics committee’s own initiative resolution, drafted by Wolf Klinz (ALDE, DE), did not however find unanimous support, with the Socialists choosing to abstain and vow to fight it out in the plenary stage of the procedure. The points of particular discord were those relating to the European credit rating foundation (ECRaF), and the way to deal with sovereign debt ratings.
The thorny issue of sovereign debt
The resolution stays away from significantly reducing the scope for private CRAs to rate sovereign debt as had been initially wished for by the Socialists and the GUE group. It does however call for more light to be shed on how CRAs arrive at their sovereign ratings and for CRAs to explain their methodologies and why their ratings deviate from forecasts of the main international financial institutions. The resolution also recognises that ratings have tended to accentuate spreads and demands a special consideration of the issue.
European Credit Rating Foundation
The other bone of contention was on the nature of a European counterweight to the three largest CRAs, seen to be too dominant on the European scene. The resolution calls for the Commission to conduct 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 had preferred a public CRA with less detail about the finance sources for the agency after the start-up period.
Reducing dependence
Through a series of measures, the resolution advocates for reducing the dependence that currently exists on a very few sources for credit ratings. The way to achieve this, the resolution says, would include increasing the use of internal credit ratings, particularly by large financial institutions with the capacity to carry out their own risk assessments, and increasing competition. Without the ability to carry out internal risk analysis, market participants should not be able to invest in structured products, or else can only do so at the highest risk weighting the resolution proposes.
To increase competition, the resolution calls on the Commission to assess possibilities for the establishment of a European network of CRAs which it says would allow smaller agencies to compete with the ‘big 3’. The resolution adds however that attention must be given to ensure that increased competition does not lead to reduced quality of ratings or ‘rating shopping’.
Liability
The resolution also deals with holding CRAs to account for the advice they give. Most importantly the adopted text calls on the Commission to identify ways for CRAs to be civilly liable through Member State civil law.
The resolution also suggests that all registered CRAs should assess the accuracy of their past credit ratings and make these assessments available to supervisors, while ESMA would be empowered to conduct unannounced checks on these assessments.
Increasing transparency
The resolution provides various solutions to enhance transparency in the way CRAs come to their opinions and the documents they would be required to provide to supervisors. The resolution also asks the commission to look further into the benefits of requiring the use of two obligatory ratings with the more conservative rating serving for regulatory oversight. This would allow investors to obtain a better idea of the real situation of the investment instrument.
In the chair: Sharon Bowles
