Regulation  

Still work to be done on credit rating reform

Still work to be done on credit rating reform

More work is needed to reduce reliance on credit rating agencies, according to the chairman of Esma.

Steven Maijoor was speaking as the European regulatory body published a report on the regulation of CRAs across the EU.

Esma has asked the European Commission for more supervisory powers regarding the appointment of independent non-executive directors by CRAs, and if fines could better reflect a CRA’s turnover.

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Mr Maijoor said: “The financial crisis made it clear that reforming the CRA industry was imperative in order to have safer financial markets, and I am pleased to report that the resulting legislation and our role as direct supervisor of CRAs are having a positive impact.

“While it is encouraging to see that changes are taking place, we are realistic and know there is still work to be done, which is why we have made recommendations relating to further supervisory powers regarding the appointment of independent non-executive directors and enhanced enforcement powers.”

He added that future action should focus on mitigating mechanistic reliance on credit ratings rather than removing them from legislation entirely since this may not be practical.

Background

The three big credit rating agencys – Standard & Poor’s, Moody’s and Fitch – were criticised for failing to warn investors of the dangers of investing in the mortgage-backed securities which led to the financial crisis.

After the crisis, most of the securities which had previously been given triple-A ratings had been downgraded to junk.