Senate votes to introduce new regulator for credit ratings agencies

14 May 2010

The US Senate has backed new legislation to introduce tougher regulation of credit ratings agencies.

Under the proposals, a government clearing house will assign different bank products to agencies on a case-by-case basis.

The aim of the plan is to stop the practice in which credit rating agencies feel under pressure to give good scores to bank products when they have been hired by a financial institution to assess one of its units.

Democrat Al Franken said: "There is a staggering conflict of interest facing the credit rating industry."

Senators voted by 64 to 35 in favor of adding the legislation to a bill proposing a variety of sweeping changes to how the financial sector is overseen, which may be passed into law next week, reports Reuters.

It is intended that the clearing house will be made up of large investors - such as endowment firms and pension funds – which use the assessments given out by the agencies as a basis for making decisions on bond purchases.

Senators also passed a proposal calling on regulators such as the Federal Deposit Insurance Corporation (FDIC) to come up with their own system of assessing creditworthiness.

It is hoped that this will ensure bodies like FDIC are no longer totally reliant on the agencies' decisions.

At the moment, three main ratings agencies dominate the sector – Moody's, Fitch and Standard and Poor's.

They have come under fire in the US for misjudging risk assessments in the run up to the financial crisis, leading investors into making poor decisions.

Earlier this month, former Treasury secretary Henry Paulson told the Financial Crisis Inquiry Commission that the agencies act as a "dangerous crutch" for both investors and banks.

"I don't want the ratings agencies to be held up as the font of all truth and have the ratings be part of our securities laws," he added.

By Asim Shah

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