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Plans to introduce tougher regulation of credit rating agencies (CRAs) are set to be announced by the European Commission. The move comes after CRAs were blamed for playing a major role in causing the continuing global credit crunch.
CRAs work by determining the worthiness or otherwise of financial investments. They have been accused of failed to spot the size and risk of the bad US housing debt that was resold around the world, causing multi-billion losses. It was the discovery of these losses that caused the global credit markets to freeze up, and ultimately led to governments around the world having to bail out their banking sectors. The BBC's Europe business reporter, Ben Shore, said the Commission is believed to want a registration system for all ratings companies wishing to operate within the European Union. It is also expected to prevent CRAs from offering consulting services in addition to ratings, because there are fears the two services may lead to a conflict of interest. CRAs may also be required to be more transparent about the methodologies they use to determine risk. The commission contends that the way CRAs assessed some products in the lead up to the financial crisis underestimated their level of risk, and so played a significant part in creating the current turmoil.
BBC
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