Curbing Rating Agencies
New measures to curb the powers of Credit Rating Agencies, including making them liable for mistakes, are being floated by the European Commission.
Internal Market Commissioner Michel Barnier on a one day visit to Dublin told the Oireachtas Joint Committee that he was ready to tackle conflicts of interest and create greater competition in the ratings business.
The move comes as the government and EU policymakers hope none of the big three ratings agencies downgrade Ireland’s credit rating, as they did to Greece earlier this year, contributing to their needing a bail-out.
Next month new EU rules will make rating agencies subject to oversight by one of the new supervisory bodies and force them to comply with rules of conduct to minimise potential for conflicts of interest, ensure higher quality ratings and greater transparency.
But now, Mr Barnier said, he was interested in taking the issue further and invited stakeholders to contribute comments over the next two months before new measures are drawn up.
The Commissioner said that all questions about how the agencies operate should be on the table, “no taboos and no shooting the messenger”, he promised.
The business of rating the credit worthiness of countries, companies and financial products is dominated by three US agencies, Standard & Poors, Moody’s and Fitches. They have been blamed for helping to create the crisis by selling good ratings for high fees and endorsing products that turned out to be toxic.
The consultation launched yesterday asks a whole series of questions. They include issues such as over reliance on external credit ratings, especially since EU and national law gives them an important role. The Commission asks how this reliance could be reduced.
Rating sovereign debt should be improved since a downgrading immediately makes a country’s borrowing more expensive. Further measures could be needed, such as three days advance warning to countries, Mr Barnier suggests.
Should Europe set up it’s own rating agencies or have the ECB issue ratings to increase competition since the rating of large multinationals and structured finance products is done almost entirely by the big three agencies, the communication asks.
Mr Barnier points out that civil liability varies from one EU country to another and could lead to agencies or issuers shopping around. He asks if a single EU regime could be introduced.
And finally on the issue of a conflict of interest the Commission asks whether the current practice of the issuers solicit and pay for the ratings of their own debt instruments should be changed.