Success Story: Credit Ratings





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Stand-up CB on Investors and financial institutions around the world have long relied on credit rating agencies' to assess risk. Those agencies are blamed in part for the financial crisis after failing to report the true risks of subprime mortgages. The European Parliament has approved legislation aimed at restoring confidence in those credit rating agencies, and in turn, stability in the financial markets.

CB off A leading force behind the reform is Jean-Paul Gauzès, the EPP Group's coordinator on the parliament's Economic and Monetary Affairs Committee. He says the legislation, to take effect in 2015, is aimed at ensuring credit ratings agencies play a positive role in the economy. And he says the legislation has already had a positive effect.

Interview Jean-Paul Gauzès, French MEP on I believe you can say that the agencies made efforts to adapt to new rules. That contrary to what was said, we didn't create a catastrophe. And that we have a certain degree of improved stability in the financial markets. But the reforms are recent enough that we can't draw all the conclusions from them, especially with sovereign debt. But I believe we can be optimistic. Je crois qu'on peut constater que les agences ont fait des efforts de s'adapter à des nouvelles règlementations. Que contrairement à ce qui était dit, on a pas crée la catastrophe. Et qu'on a une certaine meilleure quiétude sue les marchés financiers, mais les reformes sont suffisamment récentes, notamment sur les dettes souveraines, pour qu'on ne puisse pas en tirer toutes les conclusions, mais je crois qu'on peut être optimiste.

CB off Gauzes worked closely with EU Commissioner Michel Barnier, also a member of the EPP.

Michel Barnier, EU Commissioner for Internal Market and Services, on Yes, there has been a very big change for the credit ratings agencies…The agencies are part of the landscape that must be better regulated, and correctly supervised. So I say that it's not the thermometer that created the fever, but on the other hand the thermometer must function correctly. It shouldn't aggravate; it shouldn't accentuate the fever. What was sometimes the case, we saw with some ratings agencies. Oui, il y a un très grand changement pour ces agences de notation. Les agences font partie de ce paysage qui doit être mieux régule, et correctement supervise. Donc je veux dire que ce n'est pas le thermomètre qui crée la fièvre, mais en revanche le thermomètre doit fonctionner correctement. Il ne doit pas aggraver, il ne doit pas accentuer la fièvre. Ce qui était quelquefois le cas, on l´a vu avec certaines agences de notation.

CB off A number of struggling EU governments have suffered from credit ratings they say unfairly raised their borrowing costs. The legislation sets a calendar limiting unsolicited ratings of sovereign debt to three a year. The rules affect agencies including the US-based majors Fitch, Standard & Poors and Moody's, which drew criticism during the financial crisis.

Gauzès on The will to put this set of measures in place, was to avoid that there be disruptive ratings at abnormal times. Those ratings are legitimate, providing they don't disturb the markets beyond reason, especially the financial markets. For example, coming out with a rating unannounced, unrequested, the day before an Ecofin meeting, which could put in difficulty one decision or another that the ministers would take. La volonté en mettant en place ce dispositif, c'était d'éviter qu'il y ait des notations intempestives à des moments anormaux. Alors que ces notes sont légitimes à condition qu'ils ne viennent pas perturber plus que raisonnablement les marchés, notamment les marchés financières. Par exemple, sortir une note non-annoncée, non-sollicitée la veille d'une réunion d'ecofin, qui va mettre en difficulté tel ou tel décision que prendraient les ministres.

CB off The European Banking Federation has been generally supportive of the new rules.

Robert Priester, Deputy Chief Executive, European Banking Federation I think the very positive aspect of it is that it has been very firmly put in a regulatory sphere. I think also the ESMA provision, the European Security Markets Authority, to have an oversight in terms of how the governance arrangements inside the credit ratings agencies that are acceptable to offer their opinions in the European Union. That I think has beneficial effect. It's also some first step towards a more singular supervisory approach.

CB off Ratings agencies have been accused of competing for ratings contracts by making favourable ratings of certain bundled investments that included sub-prime mortgages. Some ratings agencies have been accused of conflict of interest colouring their ratings reports, helping set off the subprime financial crisis.

Priester on One element that is also very useful and very helpful is to try to diminish the over-reliance on credit ratings. That was certainly of the heady days of the pre-crisis, people were forgetting to do their own homework, and I think this is an important part of the refocus by the Parliament and the Council as co-legislator, to really make it clear to everybody that you can't just take a rating and act on the back of that.

CB off Gauzes says the reform, which is to take effect in 2015, aims to combat conflict of interest by limiting cross-investments.

Gauzes on There are risks of conflict of interest for which we have to find remedies. ll y a des risques de conflit d'intérêt auxquelles il faut apporter remèdes.

CB off European bankers back the idea but are not certain of the impact.

Priester on The proposals to eliminate conflict of interest within the agencies are sensible, but again, not that straightforward in practice to implement, so we have to see what that leads to.

CB off The reform calls for establishment of a European credit rating agency, though both Gauzes and Priester say it could be a long way off.

Priester on If the liability requirements and the obligations resting on ratings agencies are now so strict or heavy as a new market entrant as a new proposition to to do that, then the appetite is just not there in the shall we say private market context.

CB off The legislation adds teeth to the reform by increasing civil liability for ratings agency allowing those negatively affected to sue for damages.

Gauzès on
Someone who files a complaint for damages from an agency must show clearly what harm was done. What is the rule that was allegedly broken, and then it's up to the agency to prove that it did everything necessary to conform with the rules. I cite a concrete example. A rating is bad, and an investor complains, saying if that rating wasn't exact, wasn't good, it's because you employ personnel who are not qualified…

The agency would have to prove that it recruited people who filled the necessary qualifications. Celui qui se plaint d'un greffe à l'égard d'une agence, doit indiquer clairement quelle est le grief qu'il invoque. Quelle est la règlementation qui aurait été violée, et c'est alors à l'agence de prouver qu'elle a fait le nécessaire pour être en conformité avec la réglementation. Je prends un exemple concret. Une note est mauvaise, un investisseur se plaint en disant si cette note n'était pas exacte, qui n'était pas bonne, c'est parce que vous employez un personnel qui n'est pas qualifiée….

L'agence devra prouver qu'elle a recruté des personnes qui remplissaient les conditions nécessaires.

CB off The reform doesn't mean the pressure's off governments to be fiscally responsible. Credit ratings will remain an early warning system.

Priester on That is a market discipline that will indeed apply and will help sovereigns and governments to run a tidy ship.

Barnier on The real problem with the ratings agencies, it's not that they exist. We need to evaluate risk. It's an old story of evaluating risks and taking the right investment decision while having the best judgment of the risks that you take. You must know that the ratings are correct, that they come at the right moment, that they aren't required in all areas. Le vrai problème de ces agences de notation, ce n´est pas qu´elles existent. On a besoin d´évaluer les risques. C´est une vieille histoire d´évaluer les risques et de prendre une bonne décision d´investissement en ayant le meilleure jugement sur les risques qu´on prend. Il faut savoir que les notations soient correcte, qu´elle tombent au bon moment, qu´elle ne soient pas obligatoires dans tous les domaines.

Chris on It's difficult to estimate the damage from credit ratings agencies in the financial crisis – there's plenty of blame to go around. But the European Parliament has taken action aimed at ensuring that risk assessment does not compound the hardship in economies struggling to recover.

Stand-up CB on Find out more about the activities of the largest political force in parliament by checking Thanks for watching and see you again soon.
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  • Ioannis Zografos
    EPP TV Managing Producer
    +32(0) 2 284 18 45