So-called CRAs could be about to find life getting more difficult. Amidst the financial crisis, the European Commission has put forward new rules to improve assessments of companies' creditworthiness.
Credit agencies are getting poor marks for their evaluations
The regulations officially proposed in Brussels on Wednesday, November 12 are the brainchild of European Internal Market Commissioner Charlie McCreevy and are designed, in his words, "to restore market confidence."
Credit rating agencies, or CRAs, vastly overestimated the health of financial institutions such as the now-defunct Lehman Brothers investment bank in the US, helping to precipitate the current financial crisis.
Many agencies still gave Lehman Brothers a fairly positive AA rating just days before it went bankrupt.
"It would be unjust and insensitive to single out the rating agencies as the single cause for the financial turbulences, but they have played their part," McCreevy said at a press conference.
The new regulations, if approved by EU member states and the EU parliament, would subject CRAs to greater government supervision and dictate how they operate.
"The general drift in the EU is to try to prevent future financial crises by tightening the regulatory screw," said Philip Whyte, analyst at the Centre for European Reform.
The message Internal Market Commissioner McCreevy would like to send is: There's no more business as usual.
Watching the watchdogs
McCreevy hopes the proposed new rules will force CRAs to improve
Under the proposed new rules, CRAs would be banned from providing advisory services and from rating financial instruments without sufficient information to make qualified assessments.
They would be required to disclose their methods, publish annual transparency reports and conduct independent internal review of the quality of their ratings.
The reviewers would consist of three directors whose pay would not depend on the agency's business performance.
American companies like Moody's and Standard & Poor's would also be forced to register subsidiaries in the EU.
But some EU lawmakers aren't happy with the fact that monitoring and enforcement would be carried out at the national level.
"We should quickly establish EU-wide supervision," Markus Ferber, a conservative MEP from Germany, told dpa news agency.
CRAs gave Lehman Brothers the thumbs up -- and the bank went bankrupt
Still McCreevy characterizes the proposed reforms as part of an international reform effort he would like to see.
"While we are setting standards for the EU, we want these to become global standards and we will discuss them with our main international partners with that objective in mind," McCreevy said.
Those discussions will likely commence at the financial summit of the world's leading twenty economies, which takes place this Saturday in Washington. On the agenda is the role played by CRAs in the current global economic crisis -- and how to correct the shortcomings.
If the European Commission gets its way, part of the solution will be regulations to ensure that organizations responsible for evaluating the world's major financial institutions are themselves up to the job.