Credit-rating agencies are holding their breath as they wait for the latest round of regulation to hit their industry.
Officials in the European Commission are currently wrestling over how to reform the sector, which they believe still exerts too much power despite accusations that ratings had a part to play in the financial crisis.
The credit rating business is dominated by three companies, Standard and Poor’s, Moody’s, and Fitch, which between them control about 95% of the market. They award scores to judge the creditworthiness of debt-issuers, including national governments and companies.
Regulation of the agencies has already been introduced in the EU – in parallel to the US – which has forced agencies operating in Europe to register with the new European Securities and Markets Authority (ESMA).
However, Michel Barnier, the European commissioner for the internal market, wants to go further by bringing in rules to improve the agencies’ transparency and ratings methodology. The Commission started a consultation at the beginning of this year, with firm proposals expected to be published around October. But privately officials acknowledge that they do not see an easy solution.
The Commission believes that there is a structural problem in the sector because of the dominance of the big three companies and that there are potential conflicts of interest, given that companies being rated can choose the agency to perform the task.
The Commission is likely to bring in new rules on sovereign-debt rating as part of the regulation. It is considering the possibility of forcing agencies to increase the frequency of rating reviews to reduce the significance of each rating. One proposal would see agencies being forced to give governments 72 hours’ notice of a review.
EU rating agency
Although part of the consultation, the Commission appears to be distancing itself from an idea backed by Germany and several MEPs for a publicly owned EU rating agency. Commission officials are understood to believe that if the system was regulated well enough, such an agency – which itself could be open to charges that it lacked independence – would be unnecessary.
The rating agencies themselves are wary of any attempt to influence the timing of sovereign ratings, believing that this could lead to their impartiality being questioned. They believe that if they had to give prior notice of reviews, governments would use this time to try to influence the outcome. They have, however, welcomed moves to increase competition in the sector.
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