22 September 2008

Responses to the Commission consultation on CRAs

The Commission was criticized for the short consultation period which did not allow a proper impact assessment. Most respondents preferred the revised IOSCO Code of Conduct rather than new European regulation.

The Commission made public the responses received on its consultation on a further regulation on Credit Rating Agencies.

 

Generally, the Commission was criticized for the short consultation period which did not allow a proper impact assessment and analysis, many respondents claimed.

 

More specifically, most respondents reminded on the international context and preferred the revised IOSCO Code of Conduct rather than new European regulation.

 

Many respondents also warned that the regulation of the type proposed by the Commission will be perceived as enhancing the importance of Credit Rating Agencies and therefore, perversely, increasing the tendency of some investors to rely on them, as the German BdB put it. The French Banking Federation warned the European Commission from creating a distortion in competition on the regulation requirements.  

 

The EBF reminded to the potential conflict between the Commission’s two consultation papers, in that prescriptive regulation would be likely to cause and encourage over-reliance on ratings, through effects of moral hazard, rather than to induce users of ratings to be more cautious.

 

EFAMA, on the other hand, pointed out that the references to ratings in EU financial services legislation have given credit ratings a very high (and often undue) status. It has led regulators to over-rely on them and has discouraged investors from conducting further own risk analysis.

 

The IIF proposes the establishment “an external mechanism including rating-industry experts….to develop standards and to review rating agencies’ internal processes to assess adherence to such standards”, in particular, with regard to the validation and monitoring of ratings models. One way to establish such an ‘external mechanism’ is through a Self Regulatory Organization (SRO), the IIF notes, which would need to assure that its standards would be consistent with the IOSCO Code of Conduct.

 

Commissioner McCreevy announced to come forward with a proposal on Credit Rating Agencies in late October, which will include a set of substantive requirements CRAs need to respect for the authorisation and exercise of their activities in the EU. CRAs will have to register and become subject to supervision in the EU, he said. Further issues include conflicts of interest, ensuring sound rating methodologies and increasing the transparency of their rating activities.

 

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