From June 20, credit rating agencies (CRAs) will have to follow stricter rules which will make them more accountable for their actions. The new rules also aim to reduce over-reliance on credit ratings while at the same time improving the quality of the rating process. Credit rating agencies will have to be more transparent when rating sovereign states.
Michel Barnier, EU Commissioner for Internal Market and Services, said he is "very pleased that just one and a half years after the Commission made its proposal, we have reached the stage when the legislation enters into force. Under the new legislation, credit rating agencies will have to be more transparent and accountable when rating sovereign states. The new rules will also contribute to increased competition in the ratings industry currently dominated by a few market players and will reduce the over-reliance on ratings by financial market participants. This is an important step towards restoring financial stability and trust in financial institutions and will help to avoid further crises."
A credit rating is an opinion issued by a specialized firm on the creditworthiness of an entity (e.g. an issuer of bonds) or a debt instrument (e.g. bonds or asset-backed securities).
Credit rating agencies (CRAs) are major players in today's financial markets. Rating actions have a direct impact on the actions of investors, borrowers, issuers and governments. For example, a corporate downgrade can have consequences on the capital a bank must hold and a downgrade of sovereign debt can make a country's borrowing more expensive. The developments in the context of the euro debt crisis have shown the need for the regulatory framework to be strengthened. As a result, in November 2011 the Commission put forward proposals to reinforce the regulatory framework and deal with outstanding weaknesses.
The new rules target to reduce over-reliance on credit ratings, improved quality of ratings of sovereign debt of EU Member States, make credit rating agencies more accountable for their actions, reduce conflicts of interests due to the issuer pays remuneration model, and publish ratings on a European Rating Platform from June 2015. This will improve the comparability and visibility of ratings of financial instruments rated by rating agencies registered and authorized in the EU. This should also help investors to make their own credit risk assessment and contribute to more diversity in the rating industry.
As part of the package, the Commission will also review the situation in the rating market and report to the European Parliament and the Council on the appropriateness of the development of a special European system for creditworthiness assessments of sovereign debt. By 31 December 2016, the Commission is supposed to submit a report to the European Parliament and to the Council on the appropriateness and feasibility of supporting a European credit rating agency dedicated to assessing the creditworthiness of Member States' sovereign debt and/or a European credit rating foundation for all other credit ratings..
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