EU Finance Ministers to Overhaul Credit-Rating Rotation Plan

European Union finance ministers agreed to overhaul plans to force companies to rotate the credit-ratings companies they use on concerns that the measure may lead to lower quality assessments.

Governments have “great concerns” about the rotation proposal, Danish Economy Minister Margrethe Vestager told reporters today in Copenhagen after a meeting of EU finance chiefs.

The rating market is “not that mature,” Vestager said, meaning that companies may be forced to seek assessments from companies that don’t have the expertise to do the work. Denmark holds the rotating presidency of the 27-nation bloc.

Michel Barnier, the EU’s financial services commissioner, proposed the rotation rule last year as part of a draft law to toughen regulation of the industry amid concerns that some rating decisions were unjustified and exacerbated the region’s debt crisis. He said rotation would boost competition and solve potential conflicts of interest.

Under Barnier’s proposal, companies would be expected to change the company that they pay to rate their credit every three years. The time limit could be extended to six years if a business hired more than one rating company.

The bill must be agreed on by national governments and lawmakers in the European Parliament.

‘New Solutions’

The EU will re-examine how frequently rotation should be required and what phasing-in period there should be before the rules fully apply, EU officials said after the meeting.

“Rotation is an aspect of our proposal where we remain open to new solutions,” Barnier said in an e-mailed statement.

Ministers decided not to reopen existing rules on the regulation and oversight of rating companies based outside of the region. The Danish presidency had sought views on whether the requirements, agreed on in 2009, needed to be overhauled.

Ministers also urged the commission to come forward with a draft law on winding down banks in crisis.

The European Commission yesterday published a consultation document on the measures, which include writing down unsecured senior debtholders at failing lenders. Barnier put the measures on hold last year on concerns that they could further dent market confidence in the wake the fiscal crisis. He said yesterday that he will present the plans by June.

‘Controversial’ Proposals

Both the debt writedown measures, known as bail-ins, and another part of the proposals that would require nations to set up bank-financed “resolution funds” to cover costs from failing lenders, are “controversial,” Vestager said.

The trigger points where losses would be imposed on a bank’s creditors must be clear, European Central Bank Vice President Vitor Constancio said after today’s discussions.

“Some objective criteria must be in the regulation” so the market knows how to value the securities, he said. Constancio also called for the setting up of an EU level resolution fund.

There are “different positions” on the need for resolution funds, and on whether they should be set up at national or European level, Barnier said.

His proposal will, at a minimum, include the setting up of national funds with some co-ordination at EU level, officials said.

‘Never Been Used’

Swedish Finance Minister Anders Borg said Barnier’s proposals shouldn’t prevent governments from putting public money into failing banks when they want to, Borg said.

“It’s very important that we have clear and transparent ways to inject capital, because that obviously restores the credibility of the bank immediately,” Borg said after today’s discussions. “A resolution regime must also include injections where the state actually dilutes the previous shareholders,” he said.

“The problem with the bail-in is that it’s basically never been used,” Borg said. “But obviously we’re willing to discuss everything.”

There was “a very large consensus on the need to include the possibility of bail in the final proposal,” Barnier said in an emailed statement.

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