March 18, 2013 3:55 pm

Esma criticises agencies’ rating methods

The pan-European securities regulator has ordered the big three credit rating agencies to improve their data quality, procedures and disclosures after a year-long examination found significant “shortcomings” in the way they rate banks.

The European Securities and Markets Authority, which is the sole regulator of credit ratings in the 27-nation bloc, found that Moody’s, Standard & Poor’s and Fitch used outdated information, were not sufficiently transparent about how they rate banks and did not give the market enough warning of significant methodology changes.

The authority waded into the area last year after mass downgrades of European financial institutions roiled the markets and drew political brickbats. Esma steered away from criticising individual ratings, but made clear that it expected the agencies to be clearer with the public about how they arrived at their results and to be more rigorous about applying their stated criteria.

The watchdog was particularly critical of at least one agency, which it did not identify, for not giving the market sufficient notice that it was reconsidering the ratings of a large group of banks. S&P downgraded 15 global banks at one time in late 2011 and Moody’s took a similar step in mid-2012.

“Considering the continued importance of credit ratings in financial markets it is extremely important that CRAs identify and remedy those issues in their businesses which may undermine the independence, objectivity and the quality of credit ratings. This will contribute to building confidence in the transparency and smooth functioning of EU financial markets while ensuring a high level of financial consumer protection,” Steven Maijoor, Esma chairman, said in a statement.

The bank ratings announcement came as part of Esma’s annual report on the 20 credit rating agencies it regulates. It said it had also required the raters to improve their data quality and confidentiality and to get senior management more involved in compliance and control functions. Further improvements are needed in IT infrastructure and the way rating agencies present their methodology to the public, the report said.

The period the report covered was dominated by ratings downgrades. About 31 per cent of sovereign ratings and 22 per cent of financials were reduced during the first half of 2012.

All three of the agencies said they were making improvements in light of Esma’s concerns.

“We are enhancing our rating processes and activities, and are committed to further improvements in line with Esma’s recommendations,” S&P said.

Moody’s spokesman Daniel Piels said: “Moody’s is fully committed to complying with the European Regulation and to further enhancing the transparency, performance and processes surrounding our ratings.”

Fitch said: “Fitch Ratings is committed to meeting its regulatory obligations. To the extent that any of the issues raised in this report apply to Fitch they will be promptly addressed.”

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