Credit Ratings Firms Fall Short of EU Rules, ESMA Says

ESMA’s Chairman Steven Maijoor
ESMA’s Chairman Steven Maijoor said in the statement, “Considering the continued importance of credit ratings in financial markets, it is extremely important that credit rating agencies identify and remedy those issues in their businesses which may undermine the independence, objectivity and the quality” of their assessments. Photographer: Brian Capon/British Bankers' Association via Bloomberg

March 18 (Bloomberg) -- The European Union regulator that oversees Moody’s Investors Service, Standard & Poor’s and Fitch Ratings said credit rating companies are falling short of standards set by the bloc.

The European Securities and Markets Authority found failings in the “process of disclosure and implementation of changes” to the methodology used to rate the creditworthiness of Europe’s banks, the Paris-based agency said in an e-mailed statement today.

“Considering the continued importance of credit ratings in financial markets, it is extremely important that credit rating agencies identify and remedy those issues in their businesses which may undermine the independence, objectivity and the quality” of their assessments, Steven Maijoor, ESMA’s chairman, said in the statement.

Moody’s, S&P and Fitch registered with ESMA in 2011, becoming directly supervised by a single EU regulator for the first time.

The U.S. Justice Department last month filed a civil complaint accusing McGraw-Hill Cos.’s and its S&P unit of three types of fraud, the first federal case against a company over securities ratings related to the 2008 financial crisis. French bonds and U.S. Treasuries both made gains after the countries were stripped of their AAA credit ratings, in a signal that downgrades may have little bearing on borrowing costs.

‘Traditional’ Model

“We don’t need more regulation in the market, we need more competition,” Ashley Fox, a U.K. conservative member of the European Parliament, said in an interview in Brussels today. “We need new CRAs to be established that break away from the traditional rating model.

“As we’ve seen from recent sovereign downgrades, markets are making their own judgements and taking little notice of the CRAs,” Fox said.

ESMA focused its review on the links between bank and sovereign credit ratings and found that, for one or more of the ratings companies, “the information used for certain rating actions referred to significantly outdated data.” The watchdog can fine companies if they don’t respond to the findings.

“We are enhancing our rating processes and activities, and are committed to further improvements in line with ESMA’s recommendations,” said Mark Tierney, a spokesman for S&P.

Improved Controls

Credit rating firms have improved their record keeping, internal controls and level of involvement of senior management in rating decisions since ESMA’s last annual review was completed in March 2012, the regulator said.

Fitch Ratings is “committed to meeting its regulatory obligations” said Mark Morley, a London-based spokesman. “To the extent that any of the issues raised in this report apply to Fitch they will be promptly addressed.”

“Moody’s is fully committed to complying with the European regulation and to further enhancing the transparency, performance and processes surrounding our ratings as part ESMA’s continuing supervision of our industry,” said Daniel Piels, a spokesman.

To contact the editor responsible for this story: Anthony Aarons at aaarons@bloomberg.net