Credit rating agencies, currently under EU scrutiny, maintain that they need neither harmonisation of standards nor more rules – and the banking industry agrees. Sergio Beristain reports.

The EU is currently assessing credit rating agencies. In particular, it is looking at the research methods they use as well as potential conflicts of interest.

The Committee of European Securities Regulators (CESR), the regulator group inside the European Commission (EC), will complete its final advice in April 2005 after it gathers information from its previous call for evidence and from its next open hearing.

“I am very happy to say that the environment inside the CESR group is very positive and I am confident that we will produce efficient results,” says Ingrid Bonde, chair of the CESR’s credit rating agencies expert group. “So far, we are on time and I am pleased to say that we got a lot of responses to our call for evidence from the different market players. However, this is just the start and we have a long way ahead.”

The CESR is halfway through its process of evaluating the role of credit rating agencies. Even after it releases its final advice, if there is need for more legislation, the EC will still have to propose texts and procedures that may involve the European Parliament and the EU Council.

Council initiative

The initiative to look into credit rating agencies came two years ago when the EU Council, the representative of heads of state, met in Oviedo, Portugal, and decided to ask the EC to assess credit rating agencies’ activities.

However, the real kick-off was early last year when the European Parliament seconded the council’s request based on the report of Greek Socialist MEP Giorgos Katiforis.

“The debate has veered in the direction that more, rather than less, regulation of rating agencies is to the point. Against that, the agencies object that their role is not that of a consultant, in the sense that they do not make private recommendations of buying, selling or holding certain securities. They therefore conclude that they act in a journalistic capacity,” says Mr Katiforis.

Independent stance

Credit rating agencies argue that they are not meant to guide investors and that their added value lies in their independence. Jean-Luc Lepreux, senior vice-president of Moody’s France, says: “Our ratings are not a recommendation to buy or sell any sort of investment instrument or any bond that we rate.

“We express our rating opinions on the basis of the first amendment (freedom of speech) of the US constitution. We don’t have any conflict of interests that puts our objectivity at stake as we have very strict rules internally to maintain our independence when we issue ratings,” says Mr Lepreux.

Standard & Poor’s (S&P) echoes Mr Lepreux’s view that credit rating agencies act independently. “We are well recognised by the market, we are independent and we are objective in our judgement,” says S&P spokesman Martin Winn. “We are independent because we do not engage in securities trading or investing: all we do is conduct research and give opinions about creditworthiness. We have always been accountable and we have served the market well, which is the best judge of our work.”

But Mr Katiforis and other EU legislators are sceptical about the independence of credit rating agencies, whose role is becoming increasingly important with the growth of bond markets and securitisation, as well as the tendency to use ratings as a regulatory tool.

“This analogy [the journalistic role of credit rating agencies] does not hold much water from the moment that ratings become part of the regulatory mechanism of financial markets, even against the better judgment of rating agencies. Freedom of the press implies the right, on the part of the public, to ignore the opinions expressed in the press without suffering legal consequences,” says Mr Katiforis.

Point of reference

According to Mr Lepreux, the fact that the public cannot ignore credit rating agencies’ opinions and that institutions use their rating as a reference shows merely that they are successful.

“The fact that our ratings are viewed as important by market participants, means that it is our responsibility to make sure that we are accurate in our ratings. The fact that others use our ratings puts pressure on us to do a better job. Indeed, the pressure to be accurate comes with the success of being important,” he says.

Bankers support credit rating agencies’ opposition to EU legislation in this area. They say that the market should decide. “Rating agencies provide a judgment and banks decide if they use their judgment or not. Self-regulation with the use of a code of conduct is the best choice to address conflicts of interests,” says Caitriona O’Kelly of the European Banking Federation.

“Once credit rating agencies put in place a Chinese Wall to make sure that there is no conflict of interests, we feel confident that these issues are then addressed. This is why we do not believe there is a need to impose heavy legislation or procedures towards credit rating agencies that can slow down their rating processes,” she says.


The market is already self-regulating in this area. In April, the Association Française des Tresorieries d’Entreprise, Association of Corporate Treasurers and Association for Financial Professionals released a draft of a “Code of Standard Practices for Participants in the Credit Rating Process”. The standard allows each of the credit rating agencies to use its own methodology but requires them to stick to it and document it.

Although this is already a step towards what EU legislators want, market participants are still averse to the idea of a harmonised methodology. S&P appealed for no harmonisation on methodologies, saying that the market is happy with the various ones that are used. “It is entirely natural in a competitive market that there are different methodologies and criteria,” says Mr Winn.

“With regard to transparency, our policy is very clear: we make all our criteria and rating rationales freely available to the public on our website and we are very proactive in giving information to the market,” he says.

Neither are bankers and market participants keen on a single methodology. “Their [rating agencies] methodologies are part of their competitive advantage. This gives us the ability to make our own independent judgment when we look at the different ratings of a bond,” says Ms O’Kelly. “We feel that the information that is currently disclosed by them is enough to keep their competitive advantage and for the public to have confidence in them.”

While the EU is still far from implementing any legislation, rating agencies are already making clear their concerns about the possibility of tighter regulation in this area.


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