22nd Oct 2016

EU-based credit rating agency buried

  • Irish bank - the idea was to break the US agencies' monopoly on ratings (Photo: Fergus Ray Murray)

Plans to launch an independent European credit agency have fallen apart after it failed to generate enough interest in the business world.

After three years of efforts, its co-founder renounced the plans in an interview with the German daily Handelsblatt on Tuesday (30 April).

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“There were not enough investors,” Markus Krull, a former senior partner in the German-based consultancy firm Roland Berger, told the daily in an interview.

Berger, as a partner, planned to help launch the enterprise by seeking out 30 investors to create a foundation with some €300 million in start-up capital.

Krull envisioned an agency that would compete with the US-based equivalent Standard & Poor’s, Moody’s and Fitch.

All three US-based agencies work on a for-profit basis that Krull wanted to challenge with an agency based on a foundation model.

Investors, borrowers, and public administrations use the agency reports to help make investment and financial decisions.

The US-based agencies dominate 95 percent of the market.

All three have come under considerable criticism for how they have rated a number of sovereign states since the start of the financial crisis in 2008.

Standard & Poor’s and Moody’s settled lawsuits with Abu Dhabi Commercial Bank and King County, Washington, over the weekend and agreed to pay out claims that they defrauded investors just before the US housing crisis, reports the Financial Times.

Standard & Poor’s says the settlement is not an admission of guilt.

The US justice department is also suing Standard & Poor’s for $5 billion for allegedly handing out top credit ratings on subprime mortgage vehicles for large fees despite knowing their inherit dangers.

In January this year, the European Parliament voted through new rules on when and how credit rating agencies may rate state debts and the financial health of private companies.

The new rules will allow private investors to sue the agencies for negligence. It also places a cap on an agency’s shareholdings in the firms it rates.

“The new rules will contribute to increased competition in the rating industry dominated by a few market players,” said EU internal market commissioner Michel Barnier following the parliament vote.

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