EU calls for new rating agencies, new oversight with power to impose fines

EU calls for new rating agencies

BRUSSELS — The European Union’s executive on Wednesday called for European credit rating agencies to rival the three U.S.-based market leaders and proposed a new regulatory authority to oversee them with the power to impose fines.

EU Commission President Jose Manuel Barroso said the EU was also considering setting up its own rating agency. “Is it normal to have only three” from the same country giving ratings “in such a sensitive issue?” he asked, referring to the downgrades of government debt that have shaken confidence in Europe.

Credit rating is currently dominated by Moody’s, Standard & Poor’s and Fitch Ratings who are partly blamed for the financial crisis because they gave good ratings to complex securitized investments that encouraged many banks and pension funds to believe they were relatively risk-free. Many companies lost billions of euros (dollars) on such investments.

However, rating agencies have also come under fire in Europe in recent weeks because their downgrades of Greek and Spanish government debt have rocked markets — and aided the slide of the euro against the dollar as investors saw more risk that massively indebted European countries could default.

Barroso said EU moves to step up oversight of rating agencies were “not connected specifically with the problem of the debt crisis” and dated back to the agencies’ failure to give early warnings of the 2008 failure of U.S. investment bank Lehman Brothers.

“Lack of competition is of particular concern,” he told reporters. “The commission is examining structural solutions including the need for an independent European credit rating agency or stronger involvement of independent public entities in the issuing of ratings.”

Bank of France governor Christian Noyer told German daily Handelsblatt on Wednesday that credit insurers such as France’s Coface and Euler Hermes in Germany had the experience to go into the ratings business and “could easily conquer the ratings market.”

The European Commission on Wednesday proposed that a central EU regulatory body — the yet-to-be-created European Security Markets Authority — should take on oversight of rating agencies from national supervisors when new rules enter into force in December.

The new authority would register rating agencies in return for a fee and check that they meet EU rules showing that they have carefully researched the debt they are rating and that they have no conflict of interest to mar their judgment.

It could fine rating agencies that can’t show how they decided on their ratings or stop them from issuing ratings temporarily — or even permanently, as a last resort.

The proposal has to be backed by EU governments and the European Parliament.

The European Commission is also suggesting changes to the way banks are run, saying board members and shareholders must do more to check that managers aren’t taking on too much risk.

The reforms are part of a wide overhaul of financial supervision that aims at fixing the problems behind the 2008 banking crisis that forced governments to spend hundreds of billions of euro (dollars) on bailouts, sending public debt soaring and leading to harsh budget cutbacks.

The EU’s ideas — including a levy on banks to pay for the costs of winding up insolvent financial groups — will be laid out to the Group of 20 rich and emerging nations at a June summit in Canada as Europe tries to influence global rules.

It is suggesting sweeping changes to the way financial institutions are run to force banks to do more to counter risks they are taking on from investments, such as the wave of securitized debt based on housing loans that triggered the 2008 credit crisis.

An EU ideas paper — that could be followed with draft rules in early 2011 — says banks’ boards did not properly oversee senior management — either because they lacked the expertise or the time to understand the banks’ business.

It suggests that there should be a maximum of three directors on a board and that they should have a “duty of care” to safeguard the company’s financial stability.

As part of this, it wants restrictions on stock options or golden parachutes — or handouts — to board members to prevent them focusing on short-term gain at the expense of the company’s future.

It wants to make sure that the posts of chairman and chief executive officer aren’t held by the same person and calls for board members to come from more diverse backgrounds “to ask awkward questions” of management.

Risk managers should be given a more important role — on par with the chief financial office, the EU suggests — and a risk committee should mirror auditors in examining the bank’s risk exposure and publishing its findings on the company’s risk appetite.

The EU wants shareholders to become more active, calling on institutional investors — mostly pension funds — to publish their voting records at the companies where they hold shares as part of a “stewardship code” showing that they are thinking of the company’s long-term prospects.

Associated Press writer Geir Moulson in Berlin contributed to this story.