ESMA Calls for Further Improvements by CRAs

18 March 2013

The European Securities and Markets Authority (ESMA) has published its second annual report on its supervision of credit rating agencies (CRAs) in the European Union. It follows the European Parliament’s decision in January to tighten the rules on future pronouncements by CRAs.

The ESMA report examines the bank rating methodologies of the three major CRAs - Fitch, Moody’s and Standard & Poor’s (S&P) - and summarises the supervisory work undertaken by ESMA, during 2012, in ensuring that CRAs complied with the CRA Regulation. The report includes details on ESMA’s supervisory, registration, and policy work; and focuses on its investigation into bank rating methodologies and the follow up work to the March 2012 report on deficiencies in CRAs rating processes, governance and control mechanisms.

ESMA has identified progress by CRAs in their activities including improved disclosure of methodologies and ratings; internal control resources; involvement of senior management in governance and record-keeping practices. However, the report finds that CRAs have not sufficiently embedded the main requirements of the CRA Regulation in their organisations, and ESMA believes that improvements are still necessary in the following areas:

• The consistent application and comprehensive presentation of rating methodologies.
• The empowerment and resourcing of analytical and control functions.
• The monitoring and surveillance of ratings.
• The reliability of IT infrastructures.

These issues will form the basis for much of ESMA’s supervision activities as outlined in its 2013 work plan. Steven Maijoor, ESMA chair, said: “ESMA, as the EU’s supervisory authority for credit rating agencies, has a responsibility to ensure that these businesses meet the stringent criteria required of them under the CRA Regulation.

“While CRAs have made progress in meeting the regulatory requirements on integrity, transparency, responsibility and good governance, they have not sufficiently embedded in their organisations those changes necessary to address the concerns about the conflicts inherent in CRAs business models.

“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.”

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