Rating agencies - June 2008

<< GO BACK | JUNE 2008 | ISSUE NO 176

Rating agencies

In his speech to the Inaugural Global Financial Services Centre Conference in Dublin earlier this month, EU Internal Markets Commissioner, Charlie McCreevy, talked of ‘the rot at the heart of the structured finance rating process’ and called for ‘mandatory, well targeted and robust internal governance reforms.’ Highlights of the speech are set out below.

‘The financial services sector in Europe is both a significant sector in its own right, and vital in providing capital and investment across a single EU market. In recent years the growth in the sector was nearly twice that of the EU GDP – and double the levels of the late 1990s. In today’s global markets, regulation can no longer be considered “domestic”. International standards and financial globalisation have dramatically changed the landscape, both for the financial services sector and for its regulators

The response to the credit crisis

Last October, Europe’s Finance Ministers agreed a “roadmap” as a first response to the many weaknesses that the turmoil identified in the financial system. The roadmap has four key objectives, to improve transparency in the market, to improve valuation standards – especially for illiquid assets, to strengthen the EU’s prudential framework for the banking sector, to investigate structural issues, and to examine the role of the credit rating agencies.

On some of these issues work is well advanced. Endless procrastination is not my style and where good progress – involving supervisors, regulators and market experts – has been made in deliberating on potential solutions I intend to move forward purposefully rather than allow clever lobbyists manipulate or slow things down in the interests of their clients.

I said before that I would not wait indefinitely for the credit rating agencies to come forward with meaningful proposals to put their houses in order. And I mean what I say. The IOSCO Code of Conduct to which the rating agencies signed up has been shown to be a toothless wonder. The fact is that despite the checks on compliance with the IOSCO Code, no supervisor appears to have got as much as a sniff of the rot at the heart of the structured finance rating process before it all blew up. I am deeply sceptical that the appropriate response lies in building and strengthening the IOSCO Code. While external oversight of rating agencies is important it is not sufficient to adequately address the issues. Many of the recent IOSCO Task Force recommendations do not appear enforceable in a meaningful way and I am now convinced that limited but mandatory, well targeted and robust internal governance reforms are going to be imperative to complement stronger external oversight of rating agencies.

I want to thank both CESR and ESME for their valuable work even if I do not agree with all their conclusions. I welcome the focus on analytics and policy and also on the importance of corporate culture, and on the importance of the rating agencies as stressed by ESME. It is absolutely essential to ensure that there are sufficiently strong firewalls between those who, on the one hand, are charged with the primary responsibility to shareholders of driving forward earnings and those who on the other hand must have the primary responsibility for managing the quality and integrity of the rating process.

Remuneration and incentive packages for analysts must also be geared to underpinning long-term confidence in the ratings they disseminate.

I recognise that the views of our Member States’ Governments on various aspects of corporate governance diverge. For that reason I will not be proposing a template for rating agency governance that would create or could be seen as a precedent for other businesses that do not display such a central role on our financial market regulatory system or have such embedded conflicts of interest in their business models.

Having considered the reports from CESR, from ESME, and indeed the work of the IOSCO task force, and having consulted with the rating agencies themselves I am convinced that meaningful but targeted regulatory measures are now necessary for rating agencies operating in the structured credit markets in Europe, including registration, external oversight and much better internal governance.

I believe we have come a long way towards creating an environment in Europe that fosters growth and innovation in financial services. But there is still more to be done and we, by that I mean all regulators, must make sure that the regulatory environment remains flexible and current to the needs of the global financial sector. If we can achieve this aim we will ensure the success of all financial centres, not only in Europe, but throughout the world.’

The full speech can be downloaded at www.europa.eu

<< GO BACK | TOP