Credit Rating Firms To Face Tougher EU Standards Due To Role In Wall Street Collapse

November 13, 2008 11:40 a.m. EST

Brussels, Belgium (AHN) - Because of the role that credit rating agencies played in the collapse of Wall Street firms which led to the global economic turmoil, the European Union plans to impose tougher regulations on CRAs.

Among the measures being considered by the EU are to hold the CRAs liable for their opinions and to prohibit them for providing advice to banks how they could secure high debt ratings.

EU Financial Services chief Charlie McCreevy said the aim of the tougher benchmarks was to restore confidence in ratings.

McCreevy explained to media, "The reputation of credit rating agencies over the past year-and-a-half has gone down... I was quite amazed in 2006 and 2007 about the tardiness of the credit rating agencies to respond then to the emerging turmoil from rising defaults in U.S. subprime housing loans given to people with poor credit."

He said the CRAs should be placed under the supervision of European regulators as a first move to put in place measures that would prevent conflicts of interest and for the agencies to prove they comprehend the risks of debts they examine.

They would also be mandated to disclose their methodology, publish yearly transparency reports and undergo independent internal review of their ratings' quality.

To be mainly affected by the proposal are Standard & Poor's and Moody's Corporation. The two are the most tapped agencies and dominate the industry which often requires two ratings.

European banks bought shares of Wall Street firms like Lehman Brothers on the strength of the ratings of the CRAs. Lehman, until it filed for bankruptcy, had a positive AA rating. When the large American banks and investment houses collapsed, the financial standing of a significant number of EU banks also went down.

The proposal needs the approval of EU member-nations and the European Parliament. If it passes these two groups, the proposal could become a law as early as 2010.