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CRA rotation may reduce competition

Tuesday 24 January 2012 – by Karina Whalley

The proposed mandatory rotation of credit rating agencies used by companies could actually reduce competition among agencies, industry experts and MEPs said during an Econ meeting.

The European Parliament’s Economic and Monetary Affairs committee held a public hearing on Monday and Tuesday where experts argued that stepping up the supervision of credit rating agencies could help to eliminate their conflicts of interest.

French MEP, Jean-Paul Gauzes said the European Commission proposal to oblige companies to rotate CRA’s was of “no interest” since “it is not going to increase competition”.

Susan Launi, the senior counsel at Fitch Ratings which is the smallest of the three main credit rating agencies was worried the rotation provision will have the “unintended negative consequence” of reinforcing the duopoly held by Moody’s and Standard & Poor’s.

“To meet the demands of the proposed rotation, issuers will most probably use two CRAs at a time”, Launi added, which will contradict the proposal’s aim to have more opinions in the market.

Verena Ross, the executive director of the European Securities and Markets Authority also said the rotation clause could harm the quality of ratings – at least in the short term.

Related articles:

EC retaliation on rating agencies overrated

EC scraps ‘costly’ EU credit rating agency

Barnier hits out at S&P; downgrades

Esma rejects two CRA registrations

Esma advises against non-EU CRAs

S&P;: Why we changed our rating criteria

But Ross said that several proposed provisions “would have a positive effect on CRA supervision”, including rules on disclosure, conflicts of interest, a harmonised rating scale and civil liability for infringements in the third series of regulation since 2009.

Esma was urged to conduct “a broader investigation of CRA’s conflict of interest”, by German MEP Sven Giegold who proposed setting up public foundations.

The Socialist Group’s rapporteur, MEP Leonardo Domenici, called on the European Parliament to think about setting up a European regulatory agency for CRAs. He lambasted the current rating agency rules for having failed and urged for them to be reformed.

Finance Watch secretary general Thierry Philipponnat said “no single opinion should ever be allowed to influence the entire system” as all opinions are “subject to the possibility of error”.

He said the use of letters, number and symbols should be forbidden, especially for unsolicited ratings over sovereign debt and only textual arguments should be allowed by agencies.

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