EU plans new financial regulator for rating agencies

Image caption,
The Commission's new regulator would have sole authority over rating agencies

Plans for an EU-wide financial markets watchdog have been put forward by the European Commission.

The proposed "European Security Markets Authority" would initially regulate credit rating agencies, but could be given broader powers at a later date.

The agencies gave their highest "AAA" rating to billions of dollars of debts that went bad in the financial crisis.

Michel Barnier, the commissioner behind the proposal, has also advocated a single European banking regulator.

The internal market commissioner wants national regulators to transfer all their supervision powers over the rating agencies to the new authority.

"In contrast to banks and insurance companies, rating services are not linked to particular territories," the Commission said in a press release.

"The changes to rules on credit rating agencies will mean better supervision and increased transparency in this crucial sector," said Mr Barnier.

"But they are only a first step," he added. "We are looking at this market in more detail."

Under fire

The rating agencies have been accused on both sides of the Atlantic of being a major culprit in the financial crisis.

In the US, a Congressional inquiry committee was due on Wednesday to question senior managers at rating agency Moody's, as well as billionaire investor Warren Buffett, about the agencies' role in the crisis.

Image caption,
Internal markets commissioner Michel Barnier is behind the latest proposal

In Europe, Mr Barnier criticised the rating agencies in May for their rapid downgrade of Greece's debts to "junk" status.

"I think we need to go further to look at the impact of the ratings on the financial system or economic system as a whole," he said at the time.

"The power of these agencies is quite considerable not only for companies but also for states."

Conflict of interests

The rating agencies stand accused of a conflict of interests, as their fees were paid for by the banks whose deals they were rating.

Under Mr Barnier's proposal, banks would be forced to disclose full details on their financial transactions to all the rating agencies.

The Commission hopes that this will encourage other rating agencies to provide unsolicited - and more impartial - ratings for these deals.

However, it is unclear what financial incentive there would be for them to provide these competing ratings.

Bank board reforms

Separately, the Commission has also published a proposal paper on changing the way in which financial institutions such as banks are governed.

Directors and major shareholders in banks have been criticised for allowing the banks' management to take on too much risk prior to the financial crisis.

The proposals include:

  • limiting banks' boards to three directors who meet minimum levels of expertise
  • giving directors and auditors greater legal liability for their banks' performance
  • creating risk committees tasked with setting policy on banks' risk appetite
  • restrictions on managers' stock options and golden parachutes
  • requiring big investors in banks to publish how they vote at AGMs

The corporate governance "green paper" is only intended to stimulate discussion, and the Commission does not expect to propose any specific new legislation on until 2011.

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