The new rules for credit rating agencies should also clarify their working methods, boost competition and reduce reliance on their ratings, says the resolution.

The non-legislative resolution, drafted by Wolf Klinz (ALDE, DE), and approved by a show of hands, comes some weeks before the Commission is to table legislative proposals to regulate credit rating agencies (CRAs) further, and temporarily closes discussion on an issue that has split political groups.

Rating sovereign debt

The resolution refrains from significantly reducing the scope for private CRAs to rate sovereign debt, as was initially advocated by the Socialists and the GUE/NGL group. It nonetheless calls for more light to be shed on how CRAs 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. It also demands that the effects of ratings on increased spreads be analysed.

European Credit Rating Foundation

The other bone of contention was what structure to propose for a European counterweight to the three largest CRAs, which are felt to be too dominant on the European scene. The resolution calls on the Commission to carry out a detailed assessment for a fully-independent credit rating foundation, with start-up funding covering the first five years at most. Left-of-centre groups would have preferred a public CRA which could tap subsistence funding for a more open 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 able 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, proposes the resolution.

To boost competition, the resolution calls on the Commission to assess possibilities for establishing a European network of CRAs. This, it says, would allow smaller agencies to compete with the "big 3". However, it must not lead to "rating shopping" and lower standards, it adds.

Liability and transparency

The resolution looks at ways to hold CRAs to account for the advice that they give. Most importantly, the text calls on the Commission to identify ways in which CRAs can be held liable under Member States' 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, and that the European Markets and Securities Authority (ESMA) should be empowered to conduct unannounced checks on these assessments.

To ascertain how CRAs arrive at their opinions, the resolution suggests that further documentation be provided to supervisors. It also asks the Commission to look further into the benefits of requiring the use of two obligatory ratings for complex finance products, the more conservative of which would serve for regulatory oversight. This would give investors a clearer idea of the real situation of the product.

Press release