A proposal for reforming credit ratings agencies (ECON)

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24 January 2012, Brussels

“Rating agencies are both judge and jury. We need a system that is altogether more technical and less emotional”.

Finance Watch today gave evidence at a European Parliament public hearing on the European Commission’s proposed reforms of credit ratings agencies. Finance Watch Secretary General Thierry Philipponnat told the hearing that reforms must reduce the financial system’s overreliance on the use of credit ratings.

“At the moment, credit rating agencies are both judge and jury. We must find a way to keep the “judge” role whilst getting rid of their “jury” role”, he said.

Three measures would help to achieve this:

  • All references to external credit ratings should be systematically deleted from existing regulations, directives or guidelines (CRD, Solvency, ECB and ESA rules…), as partially reflected in Article 5 of the proposed Regulation.
  • Fund managers should be forced to remove all references to credit ratings from their internal rules, strengthening the current proposal to require them “not to solely or mechanistically rely on external credit ratings” (Articles 1 and 2 of the amending Directive).
  • The current letter-based ratings system should be replaced with a simple number expressing the probability of default, backed by a narrative text. This could be used to feed the European Rating Index (EURIX) managed by ESMA, as proposed in Articles 11a and 21 of the Regulation and ESMA would compute and publish on its web site the average probability of default.

“The current letter-based ratings system in not just an opinion, it is a verdict. No individual institution should have the power to influence by itself financial markets or economic decisions. We need something altogether more technical and less emotional: a system that would dilute the impact of any one particular rating agency and open the door to competition”, said Mr Philipponnat.

Speech

Webstream of hearing

Hearing documents (24-01-2012)

Legislative proposals

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