Tough times ahead for credit rating agencies

Tough times ahead for credit rating agencies (CRAs). The many financial scandals which have rattled the world over the past few years – from Enron to the Argentinian bonds to the development and credibility of structured products that have turned out to be toxic and have destroyed hundreds of billions of dollars worth of assets  – has caused quite negative an attitude by the public, who has been calling for punishing measures against them.

Latest in order of time is the European Economic and Social Committee (EESC), who earlier today issued a press release in support of the European Commission’ s plan to regulate and register Credit Rating Agencies.

The Committee encourages the Commission to use the new registration process to open up the ratings business to new CRAs, notably by supporting any initiatives to create an independent European agency. EESC rapporteur Peter Morgan (Group I, Employers, UK) stressed that CRAs must be a legal entity established in the Community and that the home Member State should be the regulator.

Furthermore, the Committee urged EU regulators not to place undue reliance on ratings, especially in the light of recent experience, where certain ratings have been found to be worthless. A clear hint to the many cases credit rating agencies issues positive ratings for financial institutions or investment offers, pushing small investors to put their money in titles and bonds which turned out to be empty boxes.

Peter Morgan declared himself delighted to see that the proposed regulation allows for withdrawal of registration and the initiation of criminal proceedings. Penalties must apply to cases of gross professional misconduct and lack of due diligence and be effective, proportionate and dissuasive.

The EESC also asks the Commission to deal with the issue of CRA disclaimers. Because the disclaimers tend to render the ratings worthless, the ratings themselves are not actually a satisfactory basis for determining regulatory capital. Steps must be taken to hold CRAs responsible for their ratings. Genuine errors can be tolerated but failures of due diligence cannot.

The EESC asks Member States’ competent authorities, as part of their organisational supervision, to watch closely the linkage between the rating business and the expectations of shareholders. Particular attention should also be paid to the structure of executive performance bonuses.


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