Members of the European Parliament (MEPs) voted on new non-legislative rules for credit rating agencies ahead of the European Commission's anticipated legislative proposals to further regulate credit rating agencies (CRAs).
The new rules call for more transparency on how CRAs determine sovereign ratings, and requires them to explain their methodologies and why their ratings deviate from the forecasts of the main international financial institutions. It also demands that the effects of ratings on increased spreads be analyzed.
The rules also call for a detailed assessment for a full-independent credit rating foundation with start-up funding covering the first five years at most. The founding of this new ratings agency will serve as a potential counterbalance to the three existing agencies that MEPs see as overly dominant in the market.
MEPs also advocate increasing the use of internal credit ratings, particularly by large financial institutions able to carry out their own risk assessments, and boosting competition. Market participants who are unable to carry out risk analyses in house should not be able to invest in structured products, or else should be able to do so only at the highest risk weighting, proposes the resolution.
To boost competition, the resolution calls on the Commission to assess possibilities for establishing a European network of CRAs. However, the Commission stressed that this should not result in lower standards within the industry but rather provide smaller agencies with the opportunity to actively participate.
The new rules also look at ways to hold CRAs accountable for the advice they give and call on the Commission to identify ways in which CRAs can be held liable under Member States' civil law.