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EC retaliation on rating agencies overrated

Monday 21 November 2011 – by [email protected]

Despite being lambasted for their behaviour leading up to the financial crisis, increasingly political proposals to overhaul the conduct of credit rating agencies have found broad opposition from a range of commentators. Andrew Hickley investigates.

“We have to accept the fact that credit rating agencies have been very useful,” MEP Wolf Klinz tells Global Financial Strategy, breaking from a near-ritual of politicians slamming the agencies since the start of the financial crisis.

“Think of Greece and think of Italy. Without them and without the markets reacting, partly in the basis of the rating development, Silvio Berlusconi would still be in charge.”

Credit rating agencies have found themselves a target of abuse from all corners: commentators have slammed the overly optimistic ratings of subprime mortgages that helped create the crisis, while numerous downgrades for the likes of Greece and Portugal have been blamed for exacerbating these countries’ fundamental economic problems.

Klinz – who wrote a non-legislative paper calling for a host of changes in the sector – argues that the rating industry is needed in order to point out inherent problems with products or countries, making CRAs entities that should not only be tolerated, but that are actually necessary.

But officials at the European Commission appear to have been less forgiving. In proposals put forward last week, the commission has mooted mandatory rotation for rating agencies, a pre-approval process for the methodologies used in ratings and a new ability to bring a civil liability action against a CRA, among other measures.

So with internal market commissioner Michel Barnier declaring a clampdown on the over-reliance of ratings and an increase in competition in an industry dominated by three firms – Moody’s, Fitch and Standard & Poor’s – what effect will the proposals have on the industry?

“Personally I think it would lead to a massive decline [in our business],” says Martin Slack, head of compliance at insurance-focused rating agency AM Best.

Slack’s complaints centre on the mandatory rotation requirement; under the proposals, if an issuer is rated by a single agency, it will be allowed to do so for three years in a row, before a mandatory four-year cooling off period is put in place.

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