House of Commons inquiry adds to renewed European activity to address the “weaknesses” of credit rating agencies
From the start of the financial crisis the private credit rating agencies (CRAs) – principally, Standard & Poor’s, Moody’s and Fitch - have been the focus of political and regulatory attention, for two principal reasons. First, their consistent failure to identify the true nature of financial products that securitised sub-prime debt. Secondly, because of the impact that their downgrades of private and sovereign debt have on the issuers of that debt and more general market confidence. There is a useful short summary of the criticisms made of CRAs here and a summary of their confused activities in relation to Greece here.
The European Commission was quick to regulate CRAs with a directly applicable Regulation in 2009, subsequently amended in 2010. The growing European sovereign debt crisis in 2011 and the concomitant downgrades and threatened downgrades of the debt of various EU member states by the CRAs has now resulted in renewed regulatory attention by the Commission, with a draft Directive and draft Regulation being proposed in November 2011 – see the press release here and the FAQs here. The Commission’s page on CRAs is here.
The UK has been less concerned to regulate the activity of CRAs – until now. On 16 December 2011 the House of Commons Treasury Committee announced an inquiry in CRAs; its terms of reference can be read here and include:
- “Do the rating agencies have the right incentives to do their job properly? Do they have conflicts of interest on either the corporate or sovereign side?”
- “How accountable are the major credit rating agencies? What is the appropriate role for independent ratings agencies? Have the ‘big three’ agencies become too powerful?”
- “Are the proposals put forward by the European Commission with respect to ratings agencies based on the right objectives? Will they achieve the Commission’s aims?”
The inquiry closes on 2 February 2012. There is no indication at this stage that the Treasury Committee’s inquiry is a precursor to legislative action.
See also: ESMA makes available data on credit ratings’ past performances and central repository launched – European Securities and Markets Authority
UPDATE 22 March 2012: ESMA has pubished its first Report on the Supervision of Credit Rating Agencies, with an accompanying press release.
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