Subprime rating actions spark EC review of agencies

The European Commission (EC) is planning an “intensive review” of credit rating agencies after the slew of recent rating actions on securities affected by poorly performing US subprime mortgages.

“Certainly we’ve been concerned by the apparent slowness of the credit rating agencies to react to changes and the deterioration of the US subprime mortgage market,” said a Brussels-based spokeswoman. The Commission is planning a widespread review of rating agencies centred upon credit ratings migration, especially within the market for US subprime residential mortgage-backed securities (RMBSs). It will also investigate their governance, the management of potential conflicts of interest and the resources available to the agencies.

In a statement, the Commission said it was responding to “widespread questions about the accuracy of some ratings”, as well as the timing of rating actions on subprime RMBSs against the backdrop of material evidence of deterioration within the market since mid-2006. It is expected to be completed as part of a Committee of European Securities Regulators report on the industry by April 2008.

London and New York-based Fitch Ratings said it had yet to be contacted by the Commission, but would be happy to answer any questions it had about the company’s business. “More generally, we are in regular communication with all the regulatory bodies globally,” the agency said. New York-based Moody's Investors Service gave a similar response, affirming it was committed to a “constructive dialogue” with regulators. New York-based Standard & Poor’s (S&P) could not be reached for comment.

In the past few months, credit rating agencies have undergone substantial criticism as they have altered ratings on a variety of derivatives linked to the US subprime mortgage market. Both Moody’s and S&P have downgraded hundreds of ratings on underperforming US subprime RMBSs. By July 11, Moody’s had placed 184 tranches spanning 91 collateralised debt obligations (CDOs) of asset-backed securities (ABSs) referencing these securities on watch for a possible downgrade. As of August 15, S&P had lowered its ratings on 121 tranches of CDOs of ABSs referencing subprime RMBSs. The agency continues to have 200 tranches on review for a possible downgrade.

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