EC works to cut reliance on rating agencies

The European Commission hopes to reduce the dependence of financial institutions, regulators and governments on rating agencies, which it sees as a key factor in the current financial crisis.

The European Parliament plans to debate new restrictions on rating agencies in October this year. According to the Commission's consultation documents, this could include reducing regulatory reliance on credit ratings, encouraging large institutions to use their own internal assessments rather than external ratings, and compelling agencies to include 'health warnings' about the risks involved with rated assets.

The EC also proposes tighter regulation of credit rating agencies (CRAs). The agencies, it said in one of the documents, "were close to the origin of the problems that have arisen in the professional structured credit markets, notably with respect to the rating of structured instruments in which subprime mortgages were embedded".

The document continued: "Many investors in these highly sophisticated instruments relied predominantly on the CRAs' expertise and judgements and took little interest in the risk characteristics of these instruments, the performance of the underlying assets or the general market outlook." 

More EC involvement, it said, will probably follow "the manifest failure of self-regulatory efforts, both formal and informal, to ensure high standards of independence, integrity and professional diligence".

Regulation could be carried out by existing national regulators, combined with assistance from the EU-wide Committee of European Securities Regulators (CESR), or by a newly created EU agency, the EC suggested.

In recent weeks, the ratings agencies have come under concerted criticism from regulators and industry lobby groups around the world for their role in the current credit crisis.

See also: Ratings agencies must try harder, Sifma says 
Iosco says regulators should monitor and inspect rating agencies 
SEC hits out at agencies over RMBS