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Risky business? - 12/11/2008

Standard and Poor’s earnings outlook on board of New York Stock Exchange © Reporters

EU moves to regulate credit rating agencies.

In another move to strengthen the financial system, the Commission is proposing controls on credit rating agencies - private companies that evaluate financial risks for investors.

In Europe they are currently not regulated but follow a voluntary code of conduct. Their failure to avert the financial crisis has however sparked calls for oversight.

Rating agencies are important to the stability of the financial markets and have a huge impact on the availability and cost of credit. It is hoped that requiring the agencies to follow certain rules will restore confidence in them.

During the US housing boom some agencies understated the danger of incorporating high-interest home loans – known as subprime mortgages – into complex investment products. This has raised concerns about their competence and their cosy relationship with the financial industry.

Under the draft law, credit agencies would have to:

  • register with European regulators and submit to monitoring by national authorities
  • disclose how they determine risk
  • make changes in their corporate governance to prevent conflicts of interest, including imposing restrictions on board members’ pay, credentials and terms for dismissal.

 

The draft legislation is the latest in a series of commission proposals to deal with the financial crisis. This weekend in Washington, leaders from 20 of the world’s top economies will meet to discuss how to end the crisis and prevent another from happening. The EU will press participants to follow its lead and adopt similar rules for credit agencies.

“I want Europe to adopt a leading role in this area,” said internal market commissioner Charlie McCreevy. “Our proposal goes further than the rules which apply in other jurisdictions.”

If approved by EU governments and the parliament, the rules could enter into force as early as 2010.

Financial services on EU single market

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