EU Targets Credit Rating Agencies

As part of measures to prevent a future financial crisis and strengthen the financial market, the European Union will impose new rules on credit rating agencies like Fitch, Moody's, and Standard & Poor's, according to a press statement issued by the European Commission on June 2.

Credit rating agencies are supposed to be experts in evaluating the creditworthiness of companies and government, and the risks of investments in sophisticated financial products like derivatives. In the recent financial crisis they failed to correctly assess the risks of investing in subprime housing loans and the various forms of complicated financial products—derivatives, leading to the worse global financial crisis since the 1930 Depression.

The new rules, to be imposed in 2010, require the agencies to disclose their rating results as well as the evaluation methods used.

Banks, investment companies and other financial institutions are also targeted. The European Securities and Markets Authority will be empowered to request information, investigate irregularities, and make on-site inspections when deemed necessary.

Chief of Internal Market and Services, Michel Barnier said that the new rules on credit rating agencies will provide better supervision and increase transparency in the vital financial sector.