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EU proposes to tighten control of credit ratings agencies

02. August 2008. | 10:33

Source: EMportal

The European Commission proposed new measures Thursday for supervising credit rating agencies, which have been blamed for contributing to world financial turmoil.

The EU's executive arm said it wanted to introduce rules that would oblige the agencies to deal with conflicts of interest, have sound rating methodologies and increase transparency in their activities.

The measures, the commission said, were aimed at ensuring that ratings remain reliable and accurate pieces of information that investors can use.

"The crisis has shown that self-regulation has not worked," said EU Internal Market Commissioner Charlie McCreevy.

"I am convinced, like others in Europe, of the need to legislate in this area at EU level."

Leading rating agencies Moody's, Standard and Poor's and Fitch have come under fire recently for being too slow to alert investors to the dangers of investments based on US subprime home mortgage loans.

Securities portfolios, especially those with securities tied to US subprime home loans, have endured vast multi-billion-dollar losses in the past year and played havoc with wider bank finances.

The ratings assigned to investment portfolios and the banks holding them often determine whether other parties will trade with the banks. They can even impact on a bank's share price.

To combat conflict of interest, Brussels wants to ban an agency in Europe from evaluating a lending institution if that institution provides the agency with five percent or more of annual revenues for ratings activities.

It also seeks to tighten control over the agencies, either by boosting cooperation between national regulators or setting up a European registry.

In the short term, McCreevy has opened public consultation on the proposals until September 5, after which he will draw up a formal proposal in the European autumn, in the hope they will be adopted by mid-2009.

Credit ratings agencies "will have to comply with exacting regulatory requirements to make sure ratings are not tainted by the conflicts of interest inherent to the ratings business," he said.


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