Mr President, Excellencies,
I have the honour to speak on behalf of the European Union and its Member States.
The Candidate Countries Turkey, the former Yugoslav Republic of Macedonia *, Montenegro* and Serbia*, the countries of the Stabilisation and Association Process and potential candidates Albania and Bosnia and Herzegovina, as well as Ukraine, the Republic of Moldova and Armenia, align themselves with this statement.
The European Union and its Member States welcome the opportunity to participate in this debate on the role of credit rating agencies in the International Financial System. Credit rating agencies are major players in today’s financial markets, with rating actions having a direct impact on the behaviour of investors, borrowers, issuers and governments. Lenient ratings, limited risk assessment, overreliance on external credit ratings, lack of transparency and conflicts of interest in assigning credit ratings were significant contributing factors to the financial crisis.
Following the financial crisis, a general consensus arose at international level, including amongst G20 member countries, on the role of credit rating agencies. In this context, the G20 committed to promote a regime for registration and supervision of credit rating agencies, whilst the Financial Stability Board (FSB) committed to reducing the risk of conflicts of interest, and to improving the quality of the rating process. The FSB also endorsed principles to reduce reliance on external credit ratings.
The European Union implemented these orientations accordingly. Since December 2010, credit rating agencies operating in the territory of the European Union must be registered and their activities are regulated. Credit rating agencies must fulfil a number of obligations to ensure the independence and integrity of the rating process and enhance the quality of the ratings issued.
In addition, the European Securities and Markets Authority has been entrusted with the centralised supervision of credit rating agencies for the European Union. This ensures on-going supervision and enforcement of the rules applicable to credit rating agencies.
Although these reforms have helped to correct certain practices and strengthen the existing rules, the European Union noted in 2011 that further improvements were needed, firstly, in terms of the quality of risk assessments, in particular of sovereign risk, and secondly, in terms of financial stability given the impact of ratings issued by an extremely small number of international private players.
These weaknesses were particularly highlighted in the episodes of tension in the EU sovereign debt markets. These included the lack of transparency in the rating of sovereign debt, lack of competition in the rating industry and lack of due diligence of financial players. In addition, the references to external ratings in the standards, laws and regulations also favoured mechanistic reliance instead of internal credit risk assessment practices.
We have built on the lessons learnt from the first reforms and considered new initiatives to enhance transparency and improve the method of risk assessments. Special attention was given to the treatment of sovereign risk. Revised rules on credit rating agencies entered into force in June 2013.
With these revised rules our intention was to reduce excessive reliance on ratings. Credit ratings should be considered as one view amongst others. The first measure to limit overreliance has been integrated into the modification of the capital requirements framework for banks. The requirement for banks to carry out their own risk analysis was strengthened and banks must not rely on external ratings in an automatic and mechanistic way. We also adopted concrete measures aiming at limiting overreliance in the asset management, investment and pension fund sectors.
The level of rating plays a crucial role for each rated country as it has an immediate effect on the cost of a country’s borrowing. A sudden downgrade of a country also has spill-over effects on other countries economically or financially related to it, with possible contagion effects on neighbouring economies. Therefore, our objective is to ensure that the risk assessments are conducted rigorously and take into account the entire economic and institutional context. We also substantially fortified, as part of new regulatory framework, the existing rules concerning sovereign debt ratings in order to improve transparency, monitoring and applicable methodologies.
The new regulatory framework of the European Union includes measures in order to increase the level of competition in this market and it expands the liability of the rating agencies.
Notwithstanding the aforementioned efforts, reflections continue on potential further next steps. Any further work will require a delicate balancing exercise between key principles, such as the freedom to assess risk and express opinions, versus the impact that rating actions have on capital markets. The European Union and its Member States plan to continue working on these issues in the coming years.
Thank you for your attention.
* The Former Yugoslav Republic of Macedonia, Montenegro and Serbia continue to be part of the Stabilisation and Association Process.