2012年-CEPS欧洲政策研究中心_What_reforms_for_the_credit_rating_industry_A_European_perspective_8页_238kb

Summary of "What reforms for the credit rating industry?" by Karel Lanno

Core Content

The document discusses the regulatory challenges and potential reforms for the credit rating agency (CRA) industry from a European perspective. It highlights the role of CRAs in financial stability and the need for more robust oversight, especially in light of the 2008 financial crisis. The paper also compares the EU's regulatory approach with that of the US and explores alternative models for CRA operations.

Main Views

• CRAs and Financial Stability: CRAs play a crucial role in financial stability, particularly in the context of the financial crisis. Their assessments influence capital requirements and the valuation of collateral, thereby affecting the risk management practices of financial institutions.

• Captive Market in the EU: The EU has created a captive market for CRAs due to the use of their ratings in regulatory frameworks such as Basel II and the ECB's liquidity operations. This has led to a situation where EU financial institutions rely heavily on CRA assessments, even though the industry is largely US-based.

• Regulatory Response: In response to the crisis, the EU introduced a new regulation for CRAs in April 2009, which is a direct legal instrument rather than a directive. This regulation includes requirements for registration, supervision, governance, operational standards, and disclosure.

• Challenges with the EU Regulation: The regulation is seen as a second-best solution to the fundamental issues in the CRA industry, such as the oligopolistic structure, conflicts of interest, and the public good nature of ratings. It may lead to fragmentation of global capital markets and create a protectionist environment.

• Alternative Models: The document explores alternative models for CRA operations, including:

  • Investor-pays model: Where investors pay for ratings, potentially aligning incentives with quality.
  • Platform-pays model: A clearing house model that could reduce conflicts of interest and improve transparency.
  • Partnership model: Inspired by the audit sector, which could enhance quality control and limit conflicts of interest.

Key Information

Credit Rating Industry Overview

• The industry is dominated by three major agencies: Moody’s, Standard & Poor’s (S&P), and Fitch.
• These agencies collectively control over 94% of the global market.
• Since 2007, all three have experienced significant revenue and net income declines, especially Fitch.
• The industry is essentially US-based, despite its growing presence in Europe.

EU Regulatory Framework

• The EU regulation came into force in December 2009, with guidance from CESR and later ESMA.
• It requires CRAs to be registered, supervised, and subject to strict governance and operational rules.
• It mandates disclosure of methodologies, conflicts of interest, and client base.
• The regulation introduces a third country regime, requiring foreign CRAs to obtain EU equivalence and local endorsement for their ratings.

US Regulatory Influence

• The US has a more established regulatory framework, including the Credit Rating Agency Reform Act of 2006 and the Dodd-Frank Act of 2010.
• The Dodd-Frank Act requires the SEC to oversee CRAs, introduce disclosure rules, and eliminate references to credit ratings in regulatory frameworks.

Criticisms and Concerns

• The EU regulation may not address the core issues of the CRA industry, such as the oligopoly and the issuer-pays model.
• It could lead to fragmentation of global capital markets and reduce the attractiveness of the EU for foreign companies.
• There are concerns about the effectiveness of CESR/ESMA in supervising the industry and the lack of involvement of the European Systemic Risk Board (ESRB).

Policy Alternatives

• The investor-pays model could align incentives with quality but may require additional regulations to prevent ancillary service conflicts.
• The platform-pays model, based on a clearing house and prudential oversight, could improve transparency and reduce moral hazard.
• The partnership model, similar to the audit sector, may offer a way to enhance quality control but faces liability challenges.

Conclusion

The EU regulation is a step towards greater oversight of CRAs but does not fundamentally change their business model. It may lead to unintended consequences, such as market fragmentation and reduced competition. More radical reforms, such as moving to the investor-pays or platform-pays model, are needed to address the underlying issues in the CRA industry. The document suggests that the EU should consider these alternatives more seriously to improve the reliability and independence of credit ratings.