EU urges more rating agency competition
BRUSSELS, Belgium—European regulators are calling for more competition among credit rating agencies as they prepare ways to fix one of the problems behind the U.S. subprime mortgage crisis, an EU official said Thursday.
EU Financial Services Commissioner Charlie McCreevy said the three major U.S.-based rating agencies -- Standard & Poor's Corp., Moody's Investors Service Inc. and Fitch Ratings -- had "significantly contributed" to financial market turmoil by underestimating the risk of complex investments.
He said more rating agencies were needed to challenge the three, and pledged "to strength competition by encouraging entry into the market by new players."
McCreevy plans to propose new rules in October for placing checks on how rating agencies work and tackling possible conflict-of-interest problems -- as the agencies often rate debt sold by banks that pay the agencies.
Europe must take the lead in reforming the sector, he said, as talks between international regulators had failed to come up with ways to improve oversight. He said the agencies' own suggestions were "insufficient."
"A regulatory solution at European level is now necessary to deal with some of the core issues," McCreevy said in prepared remarks for a speech he gave at a Brussels-based research group, the Center for European Policy Studies.
Banks have curbed lending since August, after investments based on U.S. housing loans to people with poor credit emerged as far riskier than first rated.
Many of these U.S. subprime mortgage loans had been repackaged as asset-based securities and sold to banks that did not understand the potential losses they were taking on -- triggering a lack of confidence that saw some lenders balk at taking on new debt and others rack up billions of dollars in losses.
Banks have since imposed tighter loan conditions, making it more difficult and costly for companies or home buyers to get credit -- exacerbating the global economic slowdown.
McCreevy said he wanted to set up a rating agency registry and oversight regime whereby European market regulators would supervise the agencies' policies and procedures.
This would include "reforms to the corporate and internal governance of rating agencies," he said.
