BRUSSELS IS to unveil “targeted regulatory measures” for credit-rating agencies operating in Europe over the next few months in response to anger over their role in promoting the sale of complex structured investments.
The moves, to be outlined by Charlie McCreevy, EU internal markets commissioner, in a speech in Dublin today, are partly aimed at addressing potential conflicts of interest in the rating agencies’ business model.
Although the proposals are at an early stage, they appear to go significantly further than anything in force in the US or elsewhere.
Mr McCreevy is to make clear that nothing short of oversight will do.
“I am now convinced that limited but mandatory, well-targeted and robust internal governance reforms are going to be imperative to complement stronger external oversight of rating agencies,” he will say.
“I have concluded that a regulatory solution at European level is now necessary to deal with some of the core issues.”
The announcement comes just weeks after the International Organisation of Securities Commissions (IOSCO) proposed changes to the industry code of conduct, a code Mr McCreevy will make clear falls far short of what is needed.
In withering language, Mr McCreevy will describe the code as “a toothless wonder” and point out that “no supervisor appears to have got as much as a sniff of the rot at the heart of the structured finance rating process before it all blew up”.
He will say that he is “deeply sceptical” about its usefulness. “Many of the recent IOSCO task force recommendations do not appear enforceable in a meaningful way,” he will suggest.
He will also call for “robust firewalls” to protect those responsible for the integrity of the process from executives whose priority is “to drive forward” earnings.
Mr McCreevy began the inquiry into ratings agencies last August when US banks’ practice of giving mortgages to people who were unable to repay them sparked a crisis in world credit markets.
The financial services industry itself had been warning about the problem since late in 2006, but the ratings agencies, which are paid to assess banks’ and corporations’ credit worthiness, did not act until it was too late.
Agencies such as Standard Poors and Moody’s assign ratings to banks and financial instruments based on their ability to repay debts. Many of them gave favourable ratings to securities based on high-risk mortgages, which in turn led investors to believe that they were a safer bet than they turned out to be.
They only began re-rating these securities several months after it became clear there was a problem. When Mr McCreevy launched the inquiry, his officials argued that the crisis would not have grown to the extent it did if the agencies had identified the problem sooner. – (Financial Times service)
