IOSCO wants views on credit ratings agencies, Brussels’ bete noir

The global association of securities regulators has called for views on credit ratings agencies, the anathema of Eurozone politicians during the bloc’s debt crisis.

The technical committee of the International Organization of Securities Commissions published today a consultation paper calling for opinions about the industry, by early July.

The paper stems from the widespread questioning of the operations of credit ratings agencies during the 2008/2009, when most of the complex yet highly rated credit products based on US sub-prime property loans, spectacularly collapsed.

However, credit agencies have since come under fire for cutting the credit ratings of whole countries – from Greece to Spain to Italy – when they could least afford the increased borrowing costs this brought.

Politicians from Berlin to Paris to Brussels have advocated tighter regulation of the industry, prior notice of downgrades, and increasing competition for the main three of Standard & Poor’s, Moody’s and Fitch.

But IOSCO, which has already held one study on the agencies, today defended their role: “Despite concerns about their performance during the crisis, [credit ratings agencies] continue to play an important role in most modern capital markets.

“Issuers and corporate borrowers rely on the opinions of CRAs to raise capital. Lenders and investors use credit ratings in assessing the likely risks they face when lending money to, or investing in, securities of a particular entity.

“Institutional investors and fiduciary investors, likewise, use credit ratings to help them allocate investments in a diversified risk portfolio. Finally, laws and regulations use credit ratings to distinguish creditworthiness.”

Alongside Europe’s politicians, another detractor was America’s Securities and Exchange Commission, which looked into the sub-prime residential mortgage securities rating activities of the Big Three.

The SEC noted agencies seemed to struggle with the growth in such securities, they could have documented their policies and procedures for rating the securities a lot better; and managed potential conflicts of interest better.

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