Sunday

14th Aug 2022

EU clampdown on ratings agencies defeated

France’s man in the European Commission has been stymied in his efforts to clamp down on the power of credit ratings agencies, with the core of his proposals sent back for further assessment under pressure from his colleagues.

The proposals of internal market commissioner Michel Barnier to temporarily suspend the credit rating of troubled states at times of high market volatility have been shelved.

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  • The shelving of the core of Barnier's proposals is a major defeat for the Frenchman (Photo: European Parliament)

The plans included a 'blackout' in the rating of troubled states in exceptional circumstances in an attempt to limit the ratcheting up of market instability the EU executive accuses the sector of being responsible for when it has delivered downgrades to the credit ratings of countries.

Following a meeting of commissioners where Barnier was confronted with stiff opposition from a number of his colleagues, the Frenchman said that more time was necessary “to really go into technical details of how a temporary suspension could be implemented.”

The retreat comes atop an earlier reversal when plans to create the EU’s own credit rating agency were also shelved after being assessed as unworkable.

And Barnier’s aim to limit mergers in the sector were also sent back for further work.

However, actors who use the agencies, such as banks and corporations, will still be forced to rotate the firm they employ in an effort to introduce more competition into the sector, which is dominated by the big three, Fitch, Moody’s and Standard & Poor’s, and develop the minor-league European rating agents.

According to the draft plans, firms will have to rate the agency they use every three years.

But if they use two or more firms, they are then allowed to rotate just one of the firms every three years and the other agencies would be required to be rotated every six years.

Barnier did manage also to hold on to plans to award the European Securities and Markets Agency the power to force agencies to seek approval for the methodologies employed to assess the credit of market actors.

What remains of the proposals must still be approved by the EU member states and the European Parliament.

Poul Nyrup Rasmussen, the president of the Party of European Socialists, was quick to attack the “cowed” retreat as the product of big money lobbying and “unchecked power”.

“Unchecked power and money is the big problem with credit rating agencies””, he said PES President Poul Nyrup Rasmussen.

“Unfortunately, unchecked power and money is also a big part of EU lobbying, and it would seem that Ratings Agencies have been lobbying very hard to pre-emptively reduce the impact of the Commission’s proposals."

A relatively new kid on the lobbying block, the Association for Financial Markets in Europe (AFME) - the financial sector lobby outfit established in the wake of the economic crisis to protect the sector's interests after governments announced they would begin re-regulating the financial world - still felt the retreat did not go far enough.

Simon Lewis, chief executive of AFME said: “It is important to have more competition in the credit rating agency sector, but it is also critical to maintain the quality, stability and independence of credit ratings. While the slight relaxation of the draft rotation requirements is a step in the right direction, significant questions remain."

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