Euro-Parliament approves tighter ratings agency rules

(STRASBOURG) - The European Parliament on Wednesday voted through tougher transparency standards for the credit rating agencies that many blame for stoking risk and deepening the eurozone debt crisis.

Under the new regulations, agencies such as Standard & Poor's, Moody's and Fitch, will have to be much more open in their deliberations and could face legal proceedings if found at fault in their work.

Parliament voted through the legislation 579 for, 58 against, after MEPs and the European Commission in November agreed a compromise which watered down some of the more radical proposals but still gave supervisors new bite.

EU Internal Markets Commissioner Michel Barnier said the changes "will considerably improve the quality of ratings."

The agencies "will have to be more transparent when rating sovereign states and will have to follow stricter rules which will make them more accountable for mistakes in case of negligence or intent," Barnier said in a statement.

The new rules should improve competition in an industry dominated by the top three, reduce the agencies' influence, eliminate conflicts of interest and make the companies liable to legal redress, he said.

The changes followed uproar in Europe over successive ratings downgrades at key turning points in the eurozone crisis which added to the difficulties governments faced in trying to stabilise their finances.

A downgrade in a country or company's rating marks an increase in risk and typically increases borrowing costs as a result.

The ratings agencies say in their defence that they are a crucial player, helping investors better assess risk and reward, especially at times of turmoil.

Their critics charge that the agencies instead exploited the upheaval, stoking volatility by changing their rating assessments at key moments in the debt crisis as eurozone governments floundered.

"In the past few years, investors and governments have become too dependent on the ratings agencies," said Italian Socialist MEP Leonardo Domenici, saying that some decisions "led to harmful speculation on the markets, exacerbating the eurozone debt crisis."

The new rules allow the agencies to issue unsolicited sovereign debt ratings only on dates previously announced, and then only after EU markets have closed for the day or one hour before they re-open.

Additionally, the agencies will have to explain the key factors underlying their ratings decisions, and they must not seek to influence state policies nor advocate policy changes.

The new regulations also aim to reduce the influence of the rating agencies by encouraging credit and investment institutions to establish their own risk assessment capacity.

Some MEPs were still dissatisfied with the outcome.

"We regret that the new rules are not more ambitious in terms of addressing the market power of the 'big three' agencies and potential conflicts of interest," said Sven Giegold, finance spokesman for the Greens.

Giegold welcomed the fact that the legislative text includes a call for the Commission to look at setting up an "independent European rating foundation," saying the dominance of the big three "cannot be accepted in a social market economy."

S&P, Moody's and Fitch control about 90 percent of the ratings market and are headquartered in New York, home to many of the world's biggest financial markets.

New rules on credit rating agencies (CRAs)

Further information, European Parliament

Adopted text will be available here (click on 16.01.2013)

Legislative Observatory file: Credit rating agencies, Regulation

Legislative Observatory file: Excessive reliance on credit ratings, Directive