Official Journal of the European Union

CE 380/24

Wednesday 8 June 2011
Credit rating agencies


European Parliament resolution of 8 June 2011 on credit rating agencies: future perspectives (2010/2302(INI))

2012/C 380 E/05

The European Parliament,

having regard to the International Organization of Securities Commissions (IOSCO) note of March 2009 on ‘International cooperation in oversight of credit rating agencies’,

having regard to the Joint Forum on ‘Stocktaking on the use of credit ratings’ in June 2009,

having regard to the report of the Financial Stability Board to G20 leaders entitled ‘Improving financial regulation’ of 25 September 2009,

having regard to the International Monetary Fund report of 29 October 2010 entitled ‘Global Financial Stability Report: Sovereigns, Funding and Systemic Liquidity’,

having regard to the declaration of the G20 Toronto Summit of 26 and 27 June 2010,

having regard to the report by the Financial Stability Board on ‘Principles for reducing reliance on CRA ratings’ of 27 October 2010,

having regard to the public consultation launched by the Commission on 5 November 2010,

having regard to Rule 48 of its Rules of Procedure,

having regard to the report of the Committee on Economic and Monetary Affairs and the opinion of the Committee on Legal Affairs (A7-0081/2011),


whereas it welcomes the ongoing work at global, international and European level on the regulation of credit rating agencies (CRAs),


whereas CRAs are supposed to be information intermediaries, reducing information asymmetries in the capital markets and facilitating global market access, reducing information costs and widening the potential pool of borrowers and investors, thus providing liquidity and transparency to markets and helping find prices,


whereas, in recent legislation, CRAs have been assigned another role which can be classified as one of ‘certification’, reflecting the fact that ratings are increasingly embedded in regulatory capital requirements,


whereas financial operators have placed excessive reliance on the judgments made by CRAs,


whereas CRAs rate three different sectors, the public sector, companies and structured finance instruments, and whereas CRAs played a significant role in the build-up to the financial crisis through the assignment of faulty ratings to structured finance instruments, which had to be downgraded on average three to four notches during the crisis,


whereas Regulation (EC) No 1060/2009 was the first reaction to the financial crisis and already deals with the most pressing issues, subjecting CRAs to oversight and regulation; whereas, however, it does not address all the fundamental problems and, in fact, creates some new barriers to entry,


whereas the absence of regulatory certainty in this sector is putting the proper functioning of EU financial markets at risk and therefore requires the EU Commission, before coming forward with further amendments to Regulation (EC) No 1060/2009, to identify properly the gaps in the new framework and provide an impact assessment on the range of alternatives available to fill such gaps including the possibility of further legislative proposals.


whereas the credit rating industry has various problems, amongst which the most important are the lack of competition, oligolistic structures and the lack of accountability and transparency; whereas a problem of the dominant rating agencies in particular is the payment model and whereas the regulatory system’s key problem is over-reliance on external credit ratings,


whereas the best way to enhance competition would be to create a regulatory environment effective at promoting entry, and to undertake a deeper analysis of the current barriers to entry and other factors affecting competition,


whereas, in good times, market participants tend to mistake or disregard the underlying methodology and meaning of credit ratings, which seek to pin down the probability of default,


whereas the recent developments in the euro crisis have highlighted the significant role of sovereign debt ratings and both inconsistency and pro-cyclicality in the regulatory use of ratings,


whereas independence of ratings from market and political interference is paramount and must be ensured whatever the new structures and business models that may emerge and in the context of economic governance and stress tests,


while ratings can and do change as a result of fundamental adjustments to risk profile or new information, they should be designed to be stable and not fluctuate on the basis of market sentiment,


whereas the Basel II system has resulted in excessive reliance on external ratings, leading in some cases to banks deciding against performing autonomous assessments of their exposures,


whereas recent regulation of ratings in the United States, with the Dodd-Frank Act, has opted for less regulatory reliance on agencies’ judgments,

Macro level: financial market regulation



Considers that, in the light of the change in the use of credit ratings, where the issuer is rated to get a preferential treatment under a regulatory framework rather than to gain access to the global capital markets, the over-reliance of the global financial regulatory system on external credit ratings has to be reduced as far as possible and in a realistic timeframe;


Considers that competition biases caused by the common practice that credit rating agencies assess market participants while simultaneously obtaining orders from them, have to be reduced;


Agrees with the principles set out by the Financial Stability Board in October 2010 giving general guidance on how to reduce reliance on external credit ratings, and welcomes the Commission's public consultation starting in November 2010; asks the Commission to review whether and how Member States use ratings for regulatory purposes in order to reduce the general over-reliance on them of the financial regulatory system;


Points to shortcomings in the standardised approach in the Basel regulatory framework allowing regulatory capital requirements for financial institutions to be set on the basis of external credit ratings; considers it important to establish a capital adequacy framework that ensures robust internal risk assessment, better oversight of such risk assessment, and improved access to credit-relevant information; supports in this respect the increased use of the internal-ratings-based (IRB) approach provided that it is reliable and safe and that the size, capacity and sophistication of the financial institution allow for an adequate risk assessment; considers that in order to ensure a level playing field it is important that internal models respect parameters prescribed in the EU regulation and be subject to rigorous supervisory validation; considers, at the same time, that smaller and less sophisticated players with lower capacities should be able to use external ratings, if no internal credit risk assessment is viable, provided that they fulfil appropriate due diligence requirements;


Points out the importance of following the developments under Basel III and the ongoing CRD IV process in this respect;


Sees the need to restore investors’ ability to conduct their own due diligence as a pre-requisite for enabling increased use of proprietary internal models for credit risk assessment; suggests that banks and other financial players should use proper internal risk assessments much more often;


Expresses the view that market participants should not invest in structured or other products if they cannot assess the underlying credit risk themselves, or alternatively that they should apply the highest risk weighting;


Asks the European Central Bank and the national central banks to review their use of external ratings, and urges them to build up expertise in devising their own models to assess the credit standard of eligible assets used as collateral for liquidity-providing operations, and to reduce their reliance on external ratings;


Asks the Commission to carefully assess the potential use of alternative instruments to measure credit risk;

Increased capacity for supervisors


Is aware of the inherent conflict of interest if market participants devise internal credit risk assessments for their own regulatory capital requirements, and hence sees the need to increase supervisors’ responsibilities, capacity, powers and resources for monitoring, assessing and overseeing the adequacy of the internal models and for imposing prudential measures; considers that if an internal model cannot be appropriately assessed by the supervisor due to its complexity such a model shall not be approved for regulatory use; suggests that transparency of assumptions for independent academic assessment also has a role;


States that, in order to exercise its supervisory powers effectively, the European Supervisory Authority (European Securities and Markets Authority) should have the right to conduct unannounced investigations and on-site-inspections and that, when exercising its supervisory powers, the European Securities and Markets Authority should give the persons which are subject to proceedings an opportunity of being heard in order to respect their rights of defence;

Level playing field


Highlights the global nature of the credit rating industry and urges the Commission and Member States to work together with other G20 countries on a global approach, based on the highest standards, both in respect of CRA regulation and prudential and markets regulation with respect to reducing the over-reliance on external credit ratings, in order to preserve a level playing field and prevent regulatory arbitrage while keeping markets open;


Regards the stimulation of competition, the promotion of transparency and the question of a future pay model as the most important tasks while the question of the origin of a CRA should be secondary;


Reiterates that Regulation (EC) No 1060/2009 devises two systems to deal with external credit ratings from third countries and that the intention behind the endorsement regime was to allow external credit ratings from third countries deemed non-equivalent to be used in the European Union if clear responsibility was attached to an endorsing CRA;

Intermediate level: industry structure



Stresses that increased competition in the sector does not automatically imply better quality of ratings and reiterates that all rating agencies must abide by the highest standards of integrity, disclosure, transparency and conflict of interest management as set out in the requirements of Regulation (EC) No 1060/2009 in order to ensure the quality of ratings and to avoid ‘rating shopping’;

European Credit Rating Foundation


Asks the Commission to conduct a detailed impact assessment and viability study on the costs, benefits and potential governance structure of a fully independent European Credit Rating Foundation (ECRaF) which would expand its expertise into all three sectors of ratings; believes that the Commission should consider the start-up financing costs to cover the first three to maximum five years of the ECRaF’s work and that they need to be carefully assessed; stresses that any legislative proposals to that effect need to be formulated with considerable care in order to avoid undermining the parallel policy initiatives of reducing over-reliance on ratings and encouraging new CRAs to enter the market;


Asks the Commission to produce, together with the work referred to in paragraph 9, a detailed impact assessment, viability analysis, and cost estimate for the necessary financing in this respect; is strongly of the opinion that financing costs should under no circumstances be borne by taxpayers and considers that no further funding should be provided and that the new ECRaF should be fully self-sufficient financing its own budget after the start-up period;


Considers that, to ensure its credibility, the management, staff and governance structure of the new ECRaF need to be fully independent and autonomous, i.e. not bound by instructions vis-à-vis the Member States, the Commission and all other public bodies as well as the finance industry and other CRAs, and that they need to operate in accordance with amended Regulation (EC) No 1060/2009;


Asks the Commission to conduct a detailed investigation into the costs, benefits and governance structure of such a network of European CRAs, including considerations of how nationally active CRAs could be encouraged to move to partnership or joint-network structures in order to draw on existing resources and staffing, thus possibly enabling them to provide increased coverage and allowing them to compete with CRAs active at cross-border level; suggests that the Commission could investigate methods of supporting networks of CRAs, but takes the view that any such network should be an industry-led initiative;


Sees a potential need to support the initial set-up of such a network but considers that the network ought to be self-sufficient and profitable from its own revenue; asks the Commission to assess the necessity and potential means of start-up financing and possible legal structures for this project;


Considers that the establishment of a truly independent European Credit Rating Agency should also be explored and assessed by the Commission; asks the Commission to explore particularly the issue of its staff, which should be fully independent and the issue of its resources, which should come from fees from the private financial sector;

Disclosure and access to information


Considers that credit ratings must serve the purpose of increasing information to the market in a manner that provides investors with a consistent assessment of credit risk across sectors and countries; considers it important to enable users to better scrutinise CRAs and in this respect highlights the central role of increased transparency in their activities;


Points out that, in order to enable investors to adequately assess risk and to fulfil their due-diligence and fiduciary duties, increased disclosure of information on products is necessary in the field of structured finance instruments to allow investors to make informed judgments; considers that sophisticated investors should be able to assess the underlying credits from which they can then derive the risk of a securitised product; supports the existing initiatives of the ECB and others to make more information available about structured finance instruments in this respect; calls on the Commission to assess the need to increase disclosure of information for all products in the field of financial instruments;


Notes that, in addition to their rating activity, most Credit Rating Agencies issue a number of outlooks, reviews, warnings and watches which do have a significant impact on the markets; is of the opinion that they should be disclosed according to predetermined criterion and protocols that ensure transparency and confidentiality;


Asks the Commission to propose a revision of Directive 2003/71/EC and Directive 2004/109/EC in order to ensure that sufficient accurate and complete information on structured finance instruments is more widely available;


Considers it vital in this respect that data protection aspects are fully considered in any potential future measure;


Ponders whether it would be advantageous to oblige issuers to discuss the content and method behind a structured finance instrument with a third party that is either conducting an unsolicited credit rating or devising an internal risk assessment;


Reiterates the obligation on the Commission in Recital (5) of the amended Regulation (EC) No 1060/2009 regarding transparency of information; asks the Commission to conduct the necessary analysis in order to present the result with potential amendments to the legislation to Parliament and Council as part of the current review of Regulation (EC) No 1060/2009 it is undertaking;


Notes the progress made on transparency and disclosure by CRA1 and CRA2; encourages the Commission to carry out an impact assessment of these regulations following the completion of the CRA registration process to highlight future areas where further disclosure for users may be beneficial;


Calls for, alongside increased transparency of the rating process and its internal auditing, stronger supervision of CRAs by EU supervisory authorities and of more intrusive supervision by national supervisory authorities of the use /dependency on ratings by financial institutions;

Two obligatory ratings


Is of the opinion that the Commission should consider whether, under certain circumstances, the use of two obligatory ratings is appropriate e.g. for structured finance instruments and for any external credit ratings used for regulatory purposes and whether the most conservative, meaning least favourable, external credit rating should be regarded as the reference for regulatory purpose; asks the Commission to produce an impact assessment on the potential use of two obligatory ratings;


Considers that the costs of both ratings should be borne by the issuer and that the first external credit rating should be by a hired CRA, at the choice of the issuer, while for the second external credit rating various options for the assignment should be considered, including the possibility of assignment by the European Securities and Markets Authority (ESMA), on the basis of specific, defined and objective criteria, taking historic performance into account and supporting the establishment of new CRAs while avoiding any distortions of competition;


Points out that reputation cannot be imposed by a regulator, but that every new CRA will only become accepted if it gains credibility;

Sovereign debt rating


Is aware of the fact that market players are averse to volatile credit ratings because of the high costs involved (in related sell or buy decisions) when ratings are adjusted; considers, however, that consequently ratings tend to be procyclical and to lag behind financial market developments;


Notes that CRAs shall use clear criteria to score country performance, is aware of the fact that the actual rating is not a mechanical weighting of these factors; asks the industry to clarify which methodology and judgments are used to calibrate sovereign ratings and to explain deviation from these model-generated ratings and from the forecasts of the main international financial institutions;


Notes that, according to the IMF, ratings could explain up to almost 70 % of the CDS spreads; is concerned about the procyclical effects that ratings may have and demands a special consideration of these sensitive issues;


Believes that, in order to reduce the negative ‘cliff effects’ in prices and spreads that rating changes imply, the regulation that hardwires buy or sell decisions to ratings should be eliminated;


Considers that, as almost all information on sovereigns is available in the public domain, such information should be made more easily, consistently and comparably available so that larger and more sophisticated market players are incentivised to rely on their own judgment to assess sovereign credit risk;


Believes that, given the effects that credit ratings of sovereign debt can have on the market, transparency about the methods and the reasons for decisions as well as the liability of CRAs need to be improved in this field; calls for a study to involve in this rating the future European Foundation and the future independent European Credit Rating Agency;


Supports enhanced disclosure and explanation of methodologies, models and key rating assumptions adopted by credit rating agencies, also in light of the systemic impact that a downgrade on sovereign debt may produce;

European Rating Index (EURIX)


Considers that public information on the average of existing external credit ratings from accredited CRAs is valuable; suggests therefore establishing a European Rating Index (EURIX) which incorporates all ratings of registered CRAs that are available on the market;

Micro level: business model

Payment models


Supports the existence of various payment models in the industry but highlights the existence of risks of conflicts of interest which need to be addressed by appropriate transparency and regulatory means while not imposing an unwarranted model; asks the Commission, based on the recent consultation, to come forward with proposals for alternative viable payment models that involve both issuers and users; asks the Commission in this respect to pay particular attention to the potential use of the ‧investor-pays‧ model and its advantages and disadvantages in order to make ratings less prone to conflicts of interest;


Takes the view that good governance in CRAs is crucial to ensure the quality of ratings and calls for full transparency from CRAs on the governance arrangements in place;

Accountability, responsibility and liability


Highlights that ESMA is responsible for implementing and enforcing the compliance of CRAs with Regulation (EC) No 1060/2009; considers that if external credit ratings fulfil a regulatory purpose they should not be classified as mere opinions, and that CRAs should be held accountable for the consistent application of the underlying methodology of their credit ratings; recommends therefore that CRAs’ exposure to civil liability in the event of gross negligence or misconduct be defined on a consistent basis across the EU and that the Commission should identify ways for such civil liability to be anchored in Member States’ civil law;


Points out that the ultimate responsibility for an investment decision lies with the financial market participant, i.e. the asset manager, financial institution or sophisticated investor; notes that accountability will also be further supported by the central repository (CEREP) established by CRA1, which publishes data in a standardised form on the performance of ratings issued by CRAs registered within the EU, allowing investors to make their own assessment about certain CRAs, and thereby exerting more reputational pressure; points out that investors should have effective risk management capabilities subject to adequate oversight by the administration;


Suggests that each registered CRA should conduct an annual review to assess its past credit rating performance and should compile this information in an accountability report for the supervisor; suggests that the ESMA should carry out random checks on accountability reports on a regular basis to ensure a high quality standard in credit ratings;


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Instructs its President to forward this resolution to the Council and the Commission and the governments and parliaments of the Member States.